3
Saving and
Management of Spendingg
Learning Outcomes
After studying this chapter, students will be able to understand
Define savings and its benefits,
Understand the management ofspending,
Explain the step to be followed for management ofspending.
Explain financial discipline and the ways to achieve the financial discipline in their life.
3.1 Introduction
Money plays an important role in our lives. On one side it is a tool for wealth creation for future needs
and on the other it serves as a transaction instrument for satistying present needs. While many people
Spend most of their time and energy on earning more, it is important to note that without learning the
art of spending money well along with judicious saving and prudent investing, they may not be able to
Create a promising future for themselves and their families. it may be observed that learning to manage
In
wisely could be the first step towards the bigger goal hnancial planning. this chapter we
of
Iuay about the savings, its benefits, management of spending and financial discipline.
3.2 Savings
VIngs refer to money you put aside for future use rather than spending it immediately. Savings is the
Portion of income notspent on current expenditures. Because a person does not know what will happen
Lne future, money should be saved to pay for unexpected events or emergencies. An individual's car
Financial Literacy
3.2 |
occur. Without savings, unexpected.
medical emergency could
breakdown or a family becomee fnar
may
large financial burdens. Therefore,
savings helps
an individual or
ith m
that are too costly to buy with
financial y secure.
Money can also be saved
to purchase expensive
items
or paying for a vacation can all he be accomplished
monthly
[Link]
-
an automobile,
Buying a new camera, purchasing
income.
saving a portion of In banking, savings refer
amount that is left after spending.
In economics, savings is the ings
with a bank or other financial in
accounts, which are short-term,
interest-bearing deposits
want to be able to access quickly, with little or no risk
we can
the
say that saving is money you with
different things to different people, for some it means
the least amount oftaxes. Saving means
puting
the bank while for others it means buying stock or contributing to a pension plan. But or
money in
economists, saving means only one thing- consuming less in the present in order to consume ore in
the future.
3.3 Why should we Save?
We save, basically, because we can't predict the future. Saving
money can help you become financially secure and provide a
safety net in case of an emergency. Hlere are a few reason why we
save money:
LIFE
1. Emergency Fund: One of the most important things CYCLE
to save for is unexpected financial emergencies. These NEEDS
can include losing your job, unexpected health issues
or your car or other home
appliances breaking down,
so you should have between three and six months
worth of living expenses set aside. If
you don't have an
emergency fund, you may end up having to take out
rate. A
a short-term,
high interest loan or carry a balance on a credit card at a hign n
common rule of thumb is to save three to six months' worth of expenses to have at the Iready
2. Education: The cost for private and public education are and it's getting
rising every year
year ai rises
tougher to meet these demands. As
students take on more debt, their hnanciai v
Aggressive saving is the easiest way to minimize debt. c h i l d
3. Major life events: Getting married,
None of these come travelling the world, purchasing a
no stresses and
cheap.
allows you to focus on what
Saving for such milestones helps reduce their innerc
4. Average life
really matters. our
expectancy:
support
As we our ability to work and earn more money
lifestyles will naturally decrease. age,
advancemen
And with today's health care and technology willassi
ife
expectancy has increased, which requires more funds to live [Link] noW wi n o w
you when work advancements
are no
5. Retirement: Another longer realistic. ension
s c h e m e
important reason to save is your [Link] stop
is unlikely to
provide you with enough income tomoney rerei e v e n t u a l l y
you
work, particularly as the at cover all your costs when aduallyfurther
age which you'll be able to claim it is
The sooner you start moving
saving for retirement, the less you will have to savcEhein t future
3.3
Saving and Management ofSpending ||
6. Financial Security: Suddenly finding yourself unemployed can be frightening. but its
to
something many people will experience at some point. Having a savings buffer place
in
help cover your living expenses while you find a new job can provide you with real peace
of mind.
3.4 How to Save?
is we
We can save either expenses or by increasing our income. Presuming income
by cutting same,
items are those things
spend money fro purchasing either essential or non essential items. Essential
we really cannot do without, such as food, clothing, house repair, seeds and farming tools, children's
education and healthcare. We need these things every day for survival, whereas, non essential items
are
extras' in life which we need because we enjoy them. Expenses on such can
items or
whereas
be either avoided
reduced or postponed, eg, spending money on drinks, drugs, gutka, gambling can be avoided
excessive expenses on marriage, festivals, pilgrimage can be reduced and expenses on TV, scooter, car,
the more we will be
jewellery, etc., can possibly be postponed. The less we spend on non essential items,
able to save for essential things.
How can we save when we do not have enough money even to meet our regular expenses?
needs
The common refrain is that we do not earn enough so we cannot save. The truth is that everyone
of our earnings as saving from day one of our
saving and can save. We should keep aside a portion
should start saving early and regularly in our life, even if it is
earning life. The important thing is that we we should save all or most of it. This will
a small amount. And if we get some unexpected profit/earning,
reduce our worries of future financial needs and help us in dealing with unexpected expenses.
10, we 2. If we keep aside F20 out of T100
Ifwe earn F100, we can save 20 and if
we earn can save
have saved one day's earning. In 100 earning days this would
we earn, then in 5 earning days, we would
mean savings equivalent to 20 earning days plus interest. Is it not amazing!!
100
|Income per day
80
Expenses per day
20
Saving per day
20 x 30 = 600
month
Saving in a
600x 12 = 7200
Saving in a year
Interest at 8% per annum
318
Saved amount at the end of the year 7518
This amount is equal to 75 days Income
3.5 Where to Save?
You know you can save at least a little every month. What should you do with your savings to keep them
e There are many It can be as simple as a savings account at a bank. It can be recurring or
options.
fixed deposits, or post office savings schemes.
Financial Literacy
3.4 ||
Savings Account
You can deposit money into a savinae a.
account at any
accounts are handy
for short-term savings. interest. You can take your mon
Savings and pay a little enever
bank. This will
savings safe
keep your
you need it.
Recurring Deposits create a fund for a sDecial
RD, are best it you wish to Occasion
known as
Recurring deposits popularly suitable for people who do not have a large amount of savinps. h
such as a car. These are
buying allowed.
are
month. No withdrawals
to save a small amount every
ready
Fixed Deposits a fixed period. The depositor is oitan
can deposit a sum for
Commonly known FD, this is where you
as
at the time of maturity. Withdrawals are not
a fixed deposit receipt,
which the depositor has to produce
account to be closed br
the depositor can ask for the fixed deposit
allowed, however, in case of need,
paying a penalty.
Each type of Savings vehicle has costs and
limitations. Check them carefully to besure you understand
the terms and whether they provide what you need.
3.6 Management of Spending
to manage spending is to have money
How we manage our spending also affect our saving habits. The best
insurance
drawn from banks account to fund those things that are necessities (utilities,
automatically
house payments, retirement savings, and so on) or are most important. If you didnt put sav1ngs
Consistency and
it wouldn't
autopilot, done, at least not as easily and consistently as it could be done.
get
simplicity are key when it comes to achieving financial success.
By automating your payments and investments, your bills get paid on time, every time, Saving
ney
hassle and potential late fees, and by investing automatically, you don't have a chance to spend tne
before it
gets put to work for your other goals. Managing
There is no time like the present when it comes to learning how to manage money bert. t easier.
ke
spending and keeping up with your budget can be difficult tasks, but there are waysto
manage your spending, reach your financial goals and improve your financial well-being
3.7 Steps Followed for Managing the Spending
We are
discussing the steps to be followed for managing the money now while prepar
Step 1: Take lInventory of Your Finances m o s t
Before you start
can
managing your money better, you need to know how much ofit
your re
basic stepunderstanding your current financial situation is to sit down and re rd allmoyour
to i sspent
money
i
monthly income and expenses, if needed, save receipts for a month to determine ermine
where
wake
4 - pcalto
beyond major bills like rent, utilities and debt payments. For some people, it can wake-uf
realize how much is being spent on items such as
groceries or dining Out.
|| 3.5
Saving and Management of Spending
Take a mental inventory of your current position.
Are you consistently overspending?
. Do you have enough saved up to survive an unexpected expense?
Do you live paycheck to paycheck?
.Do you have more control over day-to-day, month-to-month finances?
.Do you have a greater cushion to absorb a financial shock?
Are you getting on track to meet your financial goals?
Do you want to have more financial freedom to make the choices that allow you to enjoy life?
in
Be honest with yourself about where your weaknesses lie. You might have made some missteps
the past, but you dont have to continue on that path.
Step 2: Build a Money Management Blueprint
muscle, you have to start with the
How do you put your savings plan in action? Just like gaining physical
right equipment to gain financial muscle.
Use the steps below to build a blueprint that works for your finances.
Start with a budget: Pick a budgeting system that you'll stick with.
We like the 50/30/20 budget
needs and savings and debt repayment- but there are
plan which allocates money for wants,
choose from.
plenty of other budgeting options to
a checkbook are gone for most people,
but there is
.Track your spending: The days of balancing
and expense.
still value in accounting for each and every purchase
Find ways to save: Once you see where your money is going. you can more easily identify potential
savings. bills and
accounts for spending andsavings: Keep money designated for
Use designated This will reduce the temptation to dip
separate from your emergency fund.
budgeted expenses new car? Stash those funds in separate
a house, vacation or
into it for non-emergencies. Saving for
toward each goal.
accounts so you can see your progress
to debt repayment will help you reach the debt-
Make a plan to pay off debt: A strategic approach
most expensive debt- the accounts with the
free finish line faster. We recommend tackling your
minimum payments on the rest. Then work your way
highest interest rates first, while making
-
debt until it is all paid off.
down through any lower-interest rate
cards can be your friend, if used wisely. You can earn cash
Develop good credit habits: Credit to purchase, and boost your credit score in
back and travel rewards on things you already planned
in full each month. If your credit utilization- the
the process. The key is to pay off your balance
credit limit used hits 30%, your credit score will take a hit.
of
-
percentage your
aside now, for retirement plan and let compound
Invest in your financial future: Set money
financial freedom and stability.
interest work it's magic. The ultimate goal longterm
is
3.6 || Financial Literacy
Step 3: Make Savings a Habit
Money mastery goes beyond spending less than you make. A true sign of financial prowess is sauin.
well the short term. You ving
achieve thic in four
f
enough to live comfortably in the long term as as can
steps Save, Invest, Pay off debt, Repeat.
1. Save
Start socking away extra money to build an emergency fund. Ideally. you should have three months
worth of living expenses at your disposal in case the unthinkable happens. If that seems too ambitious
start small.
2. Invest
Invest your extra money for the future. Set yourself up for retirement by contributing to a retirement
plan. If your company offers a pension benefit, contribute enough to get the maximum.
3. Pay Off Debt
Whether it's a loan or looming credit card bill, you probably have some debt obligations. Always make
at least the minimum monthly payments so you don't fall behind. If you have extra bills to throw at your
bills, pay down the high-interest debt first.
4. Repeat
Keep building up that emergency fund, investing for retirement and knocking down your debt
Step 4: Be Persistent
at'stoo
Despite their good intentions, many people fall offthe financial bandwagon. Sticking to a budget thats
restrictive can be suffocating. aged
Navigating investment jargon can be confusing. But don't getdiscoule
Managing hnances requires an ongoing effort. To be successful, revisit your budget oftenan
analyse it. Compare your actual spending to your budget, at least monthly or more
Make adjustments to your frequenu Checkyou
actual spending.
budget if it is habitually out of line with your nline, at
balances regularly on accounts, credit
cards, and prepaid cards. You can check your Daia incur fees
incurf e e s
an ATM, on
your smart phone, or by calling your bank. Be aware that these services
check first with your financial service
ney servi
from
provider. Also, sign up for balance alert text messug c a n
your financial institution. Give yourself time to learn and
grow. With hard work and ue
manage your money with confidence.
3.8 Financiol Discipline s that
Financial discipline relers to how well to the
you are able to conform your spending and saving overtime.
you have set for yourself. It is a continuous process and it evolves as your priorities change Over i
is also based on the priorite
understanding that money is iust a tool and that you controi yo
should not control you.
Saving and Management of Spending | |3.7
Financial discipline means being in control of your money. You are able to avoid impuise spenag
and less likely to blow all of your money before paying your bills.
If you have financial discipline you will save up for an item and can set aside sinking funds without
spending the money on something else.
Case Study
MrX is a 26 years old and have been employedfor about two and half years now. He earn 750,000 monthly,
but by 10th never have anything left. He aways believed that he should thank himselfwith his salary since he
work so hardfor it but he think he overdo it. He is also very generous so whenever someone asksfor money, he
doesn't hesitate to give. He's not sure how to tackle that but he know that it will be a problem especially because
he want to settle down and start a family. This is a problem offinancial indiscipline.
A lot of others also struggle with financial indiscipline and it is good that you have realized this and
want to change it. Many of us were taught how to make money but not how to manage it, and at home,
we did not talk about it beyond noticing that 'money does not grow on trees
Financial discipline refers to how well you are able to conform your spending and saving to the plans
that you have set for yourself. It is a continuous process and it evolves as your priorities change over time.
It is also based on the understanding that money is just a tool and that you control your money, money
should not control you.
Do you have financial discipline?
need to evaluate your money situation. If you answer
If you areasking this question, it may be a sign you track.
are on the right
yes to all six questions you definitely
1. Do you pay your bills on time?
2. Do you have money in savings?
3. Are you saving for retirement?
4. Do you have an emergency fund:
help save up for larger
items or holidays?
. D o you use sinking funds to
6. Do you live below your means and practice frugal living?
sign you have
financial discipline.
Answering yes to these questions is a
How to be disciplined with money?
#1. Education
be successful
overcoming obstacles and learning
to
to
Caucating yourself on financial discipline is the key
with your money.
#2. Habit
Start to grow. Small habits turn into big habits and eventually are
Small with savings goals and continue
life-changing habils.
3.8 | Financial Literacy
#3. Acountability
Hold yourself accountable. Write down
your goals and check in every two weeks. Furthermore, you can
also find an
accountability partner that has similar financial goals.
3.9 Smart Tips to inculcate habit of financial
1.
discipline
Prepare a monthly spending budget and stick to it.
2. Invest with a goal. Goals
give direction and help you in selecting right product.
3. Avoid loans for your desires. Better do a financial planning check before going in for
purchase.
a
big
4. Invest
monthly to become regularise in your savings and this will also help
you maintain
consistency.
5. Motivate yourself by
visualising the goals and the end result for which you are working for.
6. Pamper yourself. Give yourself a party/vacation or whatever you feel like when
your savings/spending target. But please make sure to do this you achieve
budget. After all your efforts should be properly rewarded. provisioning your monthly
in
7. Penalise yourself if you stop
your investments before target date or spend more than what
have budgeted for. Your
penalty can be not having any dine out in that particular month. you
8. Be accountable to someone. Both
spouses can keep a check on each other on the
habits. spending
9. Take help of financial planner where ever you require.
10. If your credit cards
They can be a good source of suppot.
them.
are
bothering you and coming in the way of
being disciplined get rid of
11. Take review of the situations after a set period.
Unfortunately we did not learn in school on how to
be in financial
has to find it out. There are a number of
obstacles that stand in your discipline, thus you yourself
discipline. Over time we haven't practiced the basics and way when it comes to financial
in debt,
unprepared for retirement, with little to no emergency unfortunately has led many of us being
that
what our debt really costs us. We don't fund. Many of us aren't even aware of
our future. The financial
really know what our debt looks
like, or think about how it affects
financial future bright.
discipline will help you in
managing your spending and saving and make
your
Review Questions
1. Define saving? What are the benefits of saving?
2. What are the steps to be
following for themanagement of spending?
3. Define financial discipline? How to be
financial disciple with the
4. What are the smart tips to inculcate habit of money?
financial discipline?