Financial Literacy - Savings

One of the most important aspects of financial literacy is savings. We all strive to earn as much as we can, which is the right approach, but we must also understand that like more and more earnings are necessary, more and more savings are also important. The money saved today gives better returns and if it is done on a regular basis for good number of years, it may become substantial corpus, which may enable the person to go for some expensive purchase like a car or house or may use it for children education etc. Therefore saving must be made essential, right from the day one starts earning. Now the question, how much to save and till when to save. There is no thumb rule that if one earns X amount, he must save 20 or 30 or even 50% of his earnings. This is purely subjective depending on the individual’s circumstances . There are no standard norms for savings. The quantum of savings to be done totally depends on the individual based on his personal circumstances:

There are number of ways savings can be made e.g.

         - Fixed Deposit

         - Recurring Deposit

         - Public Provident Fund(PPF)

         - Share/Stock Market

         - Mutual Fund

         - National Pension Scheme

- etc.

Fixed Deposit - This is an instrument of savings provided by almost all the banks and financial institutions. Money deposited in this account fetches higher interest rate than the savings bank account. This type of saving is considered to be the safest among all types of saving. Changes in market do not have any effect on the fixed deposits. Different interest rates on F.D. are offered by different banks, therefore the investor must evaluate the interest rates, the bank’s background and other terms and conditions before taking the final decision. Because of its fixed nature, premature withdrawal of the deposit is not allowed. A penal interest will be charged in case of premature withdrawal. 

Recurring Deposit – In this option the depositor has to deposit a fixed amount on a monthly basis till the term of deposit is completed. On completion, the money deposited along the accrued interest is paid to the depositor. Recurring deposit account can be opened in any bank or Post office. The account is required to be kept alive till its maturity. This type of saving generally suits to the regular employees who earn on monthly basis.

Public Provident Fund(PPF) – This instrument has been introduced by the Govt. of India in 1968 with the objective of encouraging small investors. The scheme is initially applicable for 15 years, which may be renewed after every 5 years. There is no tax implication on the deposit or the interest earned on this deposit. The depositor can deposit a minimum of Rs.500/- to Rs.1,50,000/- (maximum)per year for a minimum period of 15 years. 

Share/Stock Market – This is risky way of making money through shares/stocks of the listed companies. Depending on the performance of the company and of course some associated factors, the stock prices of the company fluctuates. The investors using their judgment invest in the companies with the hope of making money. The profit or loss from such investments depends on the working of the company. By purchasing the shares of the company, the buyer becomes part owner of the company. He may earn dividend and other benefits during the period of his ownership. He may sell or buy more shares of the company at the prevailing prices, if he so desires.

Mutual Fund – This is also a way of investing in the stock market, but with lesser risk. In this instrument, the sale or purchase of shares or in this case units are done not by the investor himself, but by the Fund manager, who is an employee of a mutual fund company may be a bank etc. Because the investment is not done by the investor himself the responsibility of investments is transferred to fund manager. Mutual fund investment is considered to be a safer bet. SIP (Systematic Investment Plan) where the investor can invest a fixed sum on a monthly basis till he feels ok. He may stop or redeem his investment any day with applicable conditions. Due to falling interest rated on fixed deposit etc. people are shifting their savings/investments towards Mutual funds.

National Pension Scheme(NPS) – This scheme has been introduced by the Govt. of India in 2009 under Pension Fund and Regulatory Development Authority(PFRDA). Under the scheme any Indian citizen irrespective of the organisation he works in, can open an account and start depositing money annually. From 2016 the Govt. of India has increased the limit of deposit by Rs.50,000/-.  Deposit made under NPS is exempt from Income tax. After retirement, the individual can start getting the pension on the accumulated corpus. 

One can choose one or more than one options depending on what suits him, but he must choose at least one.