NSE Invest O Cast episode 14: What is the right amount of savings?

Hrishi K: Hello and welcome to another episode of NSE Presents: Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl.  My name is Hrishi K and I am your host on this podcast. It’s all about getting your money to make better investments for you in the new financial year.

You know a couple of weeks back, I was having a conversation with an older relative and he told me, he said “Hrishi, these days I see people spending so much money on buying stuff. They buy anything and everything. Then they complain that it’s very difficult to save. I am really worried about people spending so much money. What will they do when they retire?”

And that elderly relative got me thinking. What he said is true. We are spending so much money these days. New sale, spend money. Friend’s wedding, spend money. Late by 5 minutes, take an air conditioned cab. Friday and Saturday night, let’s go out. No dabba to office. Let’s order out. Let’s just spend money.

When we are spending so much money, are we even thinking of saving? And if we are, how much are we saving every month? Is that enough for us to continue to enjoy a similar lifestyle when we retire? What happens when we have kids? Is my savings account going to be enough to pay for my retirement and my child’s education at Harvard? What if my kid wants a destination wedding?

Well, I got really freaked out thinking about all these things. So I called up my producers at Invest-O-Cast and asked them to get a guest on the show who could tell us how much should one save? Or rather, what’s the amount we should roughly save?

National Stock Exchange (NSE) with the help of Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl is committed to break the limitations of geographical boundaries and reach investors across the country. In today’s episode we are going to look at how much money should we save at different stages of our lives, and how we should save it?

Let’s welcome our guest for the day, Lakshmi Iyer. Lakshmi is the Chief Investment Officer for Fixed Income and Head, Products at Kotak Mahindra Asset Management Co. She is currently managing the fixed income onshore assets of over Rs. 65,000 crore which is $11 billion. So you know that when you trust Lakshmi with your money, you can be assured it’s in safe hands. Here’s hoping she can help me and all of us get some clarity on this very tricky topic called savings.

Hrishi K: Hey Lakshmi! Welcome to this show.  It’s a pleasure having you on board.

Ms. Lakshmi:  Hi Hrishi, thank you so much.

Hrishi K: So I am going to be shooting questions at you now. And the first one a very largish one - how much should the average urban Indian save? And we are talking about someone who consumes a lot, and wants to live the good life?

Ms. Lakshmi: Sure, so firstly I must confess that I consume a lot like what you said no dabbas, swiggying it all the time and I do live life king size or should I say queen size but at the same time I think savings is equally important. While there is no rule of the thumb as to how much have to save, I think I would emphasis on the fact that you need to start saving early. I think that is going to be the true sense for arriving at your, you know the lifestyle that you live, so sustaining a lifestyle while saving is not paradox it is clearly possible and you have a life example. So I would say anything to start with at least a 10-15% of what you earn, assuming 100 bucks is what you earn a month so about 10 or 15 bucks of that is what you should definitely look at savings.

Hrishi K:  So even if you are not saving a lot initially, you are saving in a discipline manner what would work for you?

Ms. Lakshmi:  Absolutely correct.

Hrishi K: So a lot of us think saving equals income minus expenditure. I have a sneaking suspicion you don’t think that is the right way to go about it?

Ms. Lakshmi: Not at all, I think if you do that then you leave savings as a last mile and I would say is the reverse it should say income whatever you earn less what you want to save, then you should start spending because then saving assumes a lot of importance. It should not be that “Aamdani atthani kharcha rupaiya”. It should be actually that “Aadmi ek rupaya kharcha jo bachta hain after saving” that should be the money that the expenditure and believe me even after that you live a life king size.

Hrishi K: So how do we change that mentality? And most importantly, changing that mentality corollary is, how do we plan out our savings let’s say for the next four decades with a view towards retirement?

Ms. Lakshmi:  So I think key to this is starting early and I am a very very big fan of insisting that you should not say that ok, you should start saving today or start saving tomorrow, you should start saving as if yesterday and more importantly link it with a goal and when you link it with a goal and make no mistake, when you put in this element of inflation that is when you are able to extrapolate as in what is going to happen over the next 5, 10, 20, 30, 40 years or 4 decades and then make decision and then make a very prudent investment plan and that is where there is a role of a financial advisor who can help you achieve all these things pretty seamlessly.

Hrishi K:  You are listening to National Stock Exchange (NSE) presents Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl. We are committed to breaking the limitations of geographic boundaries and reach investors across the country. We are talking to Lakshmi Iyer, and she’s advising us on how much money we should save.  Here’s my next question for you. You open the newspaper and get crazy out there. There are a lot of these rules: 50-20-30 rule, the rule of 115, the rule of 72. And it’s great that all of them do exist. But do they help us decide how much we need to save?

Ms. Lakshmi:  See my view is as a layman when you just initiate into the world of savings or into the world of this mad mad haze of savings I think just ignore all of this for now and just start saving. It is very important you start small but more importantly I would harness about the fact that it is the power of compounding that is important and therefore sounds very cliché but start early, spot them young and watch them grow and then trust me these rules really will not make a material difference to your life when’s ultimately boiling down to the fact that I need to make that saving and I need to start right now.

Hrishi K: Now lot of people talk about creating lists, planning according to that list, and then calculating the amount you need. How does that work?

Ms. Lakshmi:  So I think goal based planning is very very essential, if I have to get to the studio from my work place at BKC I need Google maps, so Google maps I need to put in a destination and that destination is your milestone, so I think linking your saving to your milestone is absolutely acceptable, you need to be very pragmatic about those and I think it is absolutely right way to approaching the ways to save money.

Hrishi K:  Different age groups, obviously, and you know this is traditional thinking.  Different age groups should have different saving rates. Would you look into that and try and break that down for us?

Ms. Lakshmi:  So I do a savings of about 10-15%, now I have increased to about 20%, my mum saves it, she doesn't get any big income but whatever she gets to run the house within that also she does a saving. So I think your saving should be linked to your income stream. If your income stream is very static as in it is a consistence month on month thing then your savings rate can be fairly consistent with that. If you do not have a steady stream then you can get saving more lumpy in nature. So more than age I think the focus would be as I said on the discipline, as to how regularly you are saving and more importantly how your income stream, so link your discipline to your income stream and that will give you more consistency rather than just the age.

Hrishi K: Ok here’s a statement you could agree or disagree if you disagree then just explain yourself that why you disagree. ‘Looking at the amount we are consuming, there is a high chance that our savings goals will exceed our incomes.’ What do we do in this case?

Ms. Lakshmi:  A - that is not entirely true because the choice of the right asset class is very very important when you make a savings. So if you are in traditional mode of savings which I call that nimbu paani then you will continue to have savings out paste your income but if you have a Red Bull you get kicked sufficiently enough to ensure that your savings actually out live your income. So I think it is the way you look at it, so I don’t agree to the statement.

Hrishi K: Well, that was a great podcast today. Lakshmi has I am sure reduced our stress levels by at least 50%.  Giving us a lot of ideas, and I am sure all you listeners are going to implement a lot of the advice that she dished out today.

It’s now time for ‘Wisdom in the Bank’, the segment on this show that does a quick recap of all the points that our guest has spoken about.

• So the important thing is not how much you save but how soon you start saving
• Income minus saving equals expenditure. Start saving as of yesterday.
• Allow the power of compounding to happen
• Don’t go by our cake formula and rules, do a bit of math and build in some inflation. Engage the services of an advisor.
• Savings are linked to your income stream or your milestones, if you follow traditional investments chances are that you won’t be saving enough, you need to diversify.

That is a wrap on our show NSE presents Invest-o-cast! My name is Hrishi K I am your host on the NSE Presents: Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl. To know more about our podcast, log on to moneycontrol.com and visit the podcast section. In case you would like us to address any of your investment queries on our show do write into us at: nseinvestocast@nw18.com, nseinvestocast@nw18.com. You can also reach out to us on Twitter @moneycontrolcom or Facebook @moneycontrol.com; do remember to use #nseinvestocast #nseinvestocast.

Thank you for listening!

Disclaimer: The material on this show is for informational purposes only. Please consult a financial advisor before taking any financial decision