Comprehensive guide to long-term savings
November 03, 2020
Savings help you to get the funds you need to achieve your goals. It doesn’t take too much effort to make your savings grow. With a simple savings goal, you can afford to buy almost anything you want. Saving goals work best when you think short term, medium term or long term. Short term goals might be buying a mobile phone, a medium-term goal might be buying a car and a long-term goal could be buying a house, something which sounds far away. If you put aside some money, every time you get paid, it will help you reach your goal faster. However, you need to plan your finances according to your goals.
Billionaire Mr Seth Klarman has said, “The single greatest edge an investor can have is a long-term orientation.” Since childhood we have been asked to go for a long run, which means that we have been asked to think about our future. Have you ever wondered why? Well of course, it brings security. Long term savings mean savings for a minimum period of 3, 5, 10 or 20 years. It could be for anything - running a successful business, retiring at the age of 40 or wanting to go on a world tour.
Below are some key features of long-term savings
- Time Period- Long term savings give you enough space to understand the market trends and the features for different saving instruments in the long run. It is highly effective and very likely to result in meaningful wealth creation because it places your focus on things that really matter when it comes to saving. So, instead of thinking about day to day fluctuations of stock prices, you would focus on the company’s growth prospects or management competency. All these factors drive long-term returns.
- Power of compounding- Albert Einstein has described compound interest as the 8th wonder of the world. Compounding is a process in which the gains from an investment are reinvested to generate additional earnings over time. In the long run, the power of compounding works wonders. Compound interest helps our savings grow over the long term. Start saving early and see money multiply manifolds specifically in case of long-term savings.
- Diversified Portfolio- Diversification allows your portfolio to grow well. In the long run, you can put your money in diverse financial products thereby reducing your risk and generating greater returns in the long run.
- Risk- Risk is substantially covered in case of long-term saving options. The probability of risk is high in case of short-term savings due to rigorous fluctuations in a small span of time.
- Beats Inflation- Savings with a longer time horizon, help you beat inflation as time joins hands with compounding, thereby enabling you to maximise your wealth.
Long term savings instruments
Below table describes some effective long-term saving instruments:
|Public Provident Fund (PPF)- It is a tool offered by the Government with a minimum investment of Rs 500 and maximum of Rs 1,50,000 per annum. Investing in PPF also offers tax benefits.||15 years|
|National Pension System (NPS)- It is a Government-initiated scheme wherein people can start saving early to reap returns pre or post retirement. It is also a tax saving instrument.||Till retirement|
|National Savings Certificate (NSC)- It is a Government sponsored scheme for small and medium income investors with a minimum investment of Rs 100 and no maximum limit.||5 years|
|Equity Mutual Funds – Equity Mutual Funds offer good returns in the long term by spreading your investment across different companies and sectors. Some equity mutual funds also offer tax benefits.||3 years in case of tax saving Equity Linked Savings Scheme (ELSS) mutual funds.|
|Unit Linked Insurance Plans (ULIPs)- These invest in equity and debt markets and give decent returns in the long term along with providing insurance cover. They also provide tax benefits and help you in achieving various financial goals.||5 years|
|Long term bank Fixed Deposits- Instead of parking your funds in a Savings Account for a long period of time, you can put your money into Fixed Deposits which offer a higher interest rate.||5 to 10 years|
Critical tips for long term savings
- Long term saving is simple but not easy – The most important ingredient of long-term saving is having self-discipline. Picking an instrument and investing can be learnt with a lot of data, books and material available on the internet, but self-discipline on saving every month cannot be learnt or taught. This is something which you need to develop from within.
- Long term saving is not buy and pay investing- We all might have come across a situation wherein the waiter asks us whether we would like to have mushrooms in our soup because mushrooms do not suit everyone’s tastes and likings. Similarly, all financial instruments might not suit everyone. You need to evaluate your choice of investment depending on your goals and risk appetite.
- Inculcate the habit of saving – Every increase in your income should be re-invested as this will help in achieving your goal faster and with ease. For e.g. Every annual bonus, every increase in salary or any lump sum amount like a matured Fixed Deposit which we receive should be re-invested.
- Follow the 50-20-30 rule- According to this rule, every month you divide your income in the following way: 50% is spent on living expenses like rent, groceries, etc. 30% goes for entertainment purposes like going out to eat or watching a movie and the remaining 20% will go right into your Savings Account. Doing this at the beginning of the month, will help you in understanding how much you will be able to save every month.
- Overreaction is harmful to your wealth- Avoid panic. Overreaction is a toxic habit for your investments. A small market crash or a temporary fall in interest rates should not bring a halt to your investment plan. For e.g. In this pandemic, stock markets across the world have fallen drastically as Covid was spreading, but with time we are almost back to pre-Covid times. Situations like these are temporary and you must adopt portfolio churning rather than stopping your investments.
As the popular saying goes, “Little drops make the mighty ocean.” Even if you cannot save much, your regular deposits plus the interest you get will fetch you a decent profit in the long run. Savings lead to financial comfort and security. So, in many important ways savings go hand in hand in having a happy future.
The contents of this document are meant merely for information purposes. The information contained herein is subject to updation, completion, revision, verification and amendment and the same may change materially. The information provided herein is not intended for distribution to, or use by, any person in any jurisdiction where such distribution or use would (by reason of that person‘s nationality, residence or otherwise) be contrary to law or regulation or would subject lClCl Bank or its affiliates to any licensing or registration requirements. This document is not an offer, invitation or solicitation of any kind to buy or sell any security and is not intended to create any rights or obligations. Nothing in this document is intended to constitute legal, tax, securities or investment advice, or opinion regarding the appropriateness of any investment, or a solicitation for any product or service. Please obtain professional legal, tax and other investment advice before making any investment. Any investment decisions that may be made by you shall be at your sole discretion, independent analysis and at your own evaluation of the risks involved. The use of any information set out in this document is entirely at the recipient's own risk. The information set out in this document has been prepared by ICICI Bank based upon projections which have been determined in good faith by lClCl Bank and from sources deemed reliable. There can be no assurance that such projections will prove to be accurate. lClCl Bank does not accept any responsibility for any errors whether caused by negligence or otherwise or for any loss or damage incurred by anyone in reliance on anything set out in this document. The information set out in this document has been prepared by ICICI Bank based upon projections which have been determined in good faith and sources considered reliable by lClCl Bank. In preparing this document we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us or which was otherwise reviewed by us. Past performance cannot be a guide to future performance. 'lClCl ' and the 'I-man' logo are the trademarks and property of lCICl Bank. Misuse of any intellectual property, or any other content displayed herein is strictly prohibited.