Money Education – Part 2 (increase savings,reduce expenses)

So now that weve internalised the lesson that we need to make our expenses smaller than our income lets look at the next concept. Whats the imapct of incerasing savings v/s reducing expenses.

When income is greater than expenses we can use this equation

Income(I) – Expenses (E) = Savings (S)

Now we are in a whole new universe here. Lets start with a case of doing this for a monthly savings scenario. Indias household savings rate is at around 17% in fy18.

Case 1: Average Indian Savings Rate

So lets assume a household income of 40,000 a month and see how the numbers stack up

I = 40,000 E=33,200 S=6,800 for a savings rate of 17%

So lets now extrapolate this to one working year

I(Annual) = 4,80,000  E(Annual)= 3,98,400 and S(Annual) = 81,600

So at a savings rate of 17% you end up saving nearly 2 months income or 2 and a half months expenses not bad.

Case 2: Saving rate of 20%

 I=40,000 E=32,000 S=8,000 for a savings rate of 20%

So lets now extrapolate this to one working year

I(Annual) = 4,80,000  E(Annual)= 3,84,000 and S(Annual) = 96,000

So at a savings rate of 20% you end up saving nearly 2.5 months income or 3 months expenses.

Lets hike that up one more time to see where this is going

Case 3: Saving rate of 25%

 I=40,000 E=30,000 S=10,000 for a savings rate of 25%

So lets now extrapolate this to one working year

I(Annual) = 4,80,000  E(Annual)= 3,00,000 and S(Annual) = 1,20,000

So at a savings rate of 25% you end up saving nearly 3 months income or 4 months expenses.

You see where I’m headed with this. Keeping income steady, every point reduction in your expenses leads to a tremendous increase in your savings to expense ratio.

The impact of reducing expenses.

Just for a comparison lets see what happes if we keep our expenses the same and increase our salary to hit the same rupee amount in savings.

Case 1: Average Indian Savings Rate

So lets assume a household income of 40,000 a month and see how the numbers stack up

I = 40,000 E=33,200  S=6,800 for a savings rate of 17%

So lets now extrapolate this to one working year

I(Annual) = 4,80,000  E(Annual)= 3,98,400 and S(Annual) = 81,600

So at a savings rate of 17% you end up saving nearly 2 months income or 2 and a half months expenses not bad.

Case 2: You got a 3% raise keep same expenses increase savings to 8000 a month

 I=41,200 E=33,200 S=8,000

So lets now extrapolate this to one working year

I(Annual) = 4,94,000  E(Annual)= 3,98,400 and S(Annual) = 96,000

So at a savings rate of 20% you end up saving nearly 2.3 months income or 2.89months expenses.

Lets hike that up one more time to see where this is going

Case 3: You got a 8% raise keep same expenses increase savings to 1000 a month

I=43,200 E=33,200 S=10,000 for a savings rate of

So lets now extrapolate this to one working year

I(Annual) = 5,18,400  E(Annual)= 3,98,400 and S(Annual) = 1,20,000

So end up saving nearly 2.77 months income or 3.6 months expenses.

So You need to get a lot more increase in income to be able to buy yourself out of the same number of months of expenses. That’s the lesson here. If you can cut an superfluous expense that has a greater multiplier effect than increasing your income.

And that’s the second bit you need to internalise. To increase savings its better to 1. Cut superfluous expenses. and then 2. Increase your income.

Yours truly

Poixe-kar

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