Mutual Funds Strategy 116: The Importance of Having 5 Lakhs in Your Savings Account.
There are only three things that you could ever do with money —
- Spend
- Save
- Invest
You might have made a long list of items to do when you have money, but at the end of the day, it either falls into one of these 3 buckets, and this is the same for everyone in the world. The smartest people in the world are the ones who manage the proportion of allocation into each of these buckets.
No one would have told you this earlier, so let me try my best to explain it to you.
Do not save what is left after spending, But spend what is left after saving. — Warren Buffett
Why do you think Mr. Buffet made this statement? There are 2 aspects to this
- Save first — This will ensure you have some safety even if something happens to your primary income.
- Spend whats left — This will ensure you have more control over your spending pattern.
Let me illustrate with an example. If you are allowed to buy only using cash (no credit card), and you walk into a supermarket with Rs1000 and Rs10000 each in your wallet. What do you think the outcome will be?
Most likely, you will end up buying more things when you have more money in your pocket. You will even end up buying things that you don’t really need. It is just psychology. So the best solution to control your spending is to go shopping with less money in your wallet.
When Mr. Buffet made this statement, investing was not accessible to most of the public. After the launch of mutual funds, a common person was able to invest. Not just that, the mutual funds made it so simple that people started investing even before saving.
I am here to explain why the statement made by Mr. Buffet is timeless and still valid even after the changes in the investing landscape.
I reiterate that even if you have the opportunity to invest, you should do so only after saving. When it comes to money, the priority is —
- Save First.
- Invest Second.
- Spend Third.
If you dont have enough money to spend, then cut short investing, but do not cut the savings.
There are 2 advantages of having a savings fund.
- It will protect you if you lose your primary income.
- It will protect you from pre-mature redemption of investments.
Both these points require detailed explanation and I am going to help you understand the seriousness of both.
- A savings fund should ideally have at least 6 months of your primary income. These days, job losses are common. The medical emergency cannot be ruled out either. If the times are bad and you go through either one of them, your family should have enough funds to endure this bad phase. Trust me, only a savings fund will help you. Taking a loan is a bad idea, and asking a friend is much worse.
- Premature redemption of Investments is the worst possible thing you can think of. This is something that I usually see my clients do. Ideally, you should not touch your investments till the maturity date, because if you do, you will be doing a fire sale. The investments will get sold off at a lower value and you will never be able to control the outcome.
A savings fund, as the name suggests, will save you when the times are bad.
This new financial year 2025–26, take the resolution to save at least 5 lakhs. It is not easy, but it is doable. And do not worry, I will show you the path to get a fixed deposit-like return plus the emergency liquidity at the same time. What you need to do is open a liquid mutual fund, choose either of SBI, HDFC or ICICI MF’s liquid fund.
Over the last year, they have given annual returns between 7.32% to 7.4%, much similar to the FD rates. On top of that, these funds are extremely liquid. If you want the funds the same day, just log the withdrawal request before 12 noon, and the funds will be in your bank account the same day. If you log the request after 12, the funds will be in your bank the next day.
Unlike a fixed deposit, liquid mutual funds do not have a redemption charge or penalty if withdrawn. FDs usually charge you 1% as a premature redemption penalty. Liquid funds, on the other hand, have a 0.007% penalty if withdrawn in the first 7 days of investing. I am quite sure most of you can wait for the 8th day for a redemption after opening a fresh investment.
If you are too tight and on a budget, allocating huge sums to a savings fund may be difficult. I am talking about people who are already behind on their dues, EMIs and debt. The only way out is to start an SIP in liquid mutual funds and crawl out of the bad debt. A Suggestion is to allocate 25% of your monthly income as an SIP into liquid funds, till you gain confidence.
Once I started suggesting the idea of an emergency liquid fund or fixed deposits to my client circle, their self-esteem and self-confidence increased. If you have Rs5 lakhs in your savings account, would you not feel confident facing all the minor challenges life throws at you?
Once you have attained this confidence, you can stop saving and then start investing every incremental amount into an equity fund or a hybrid mutual fund.
Just like the psychology of spending, there is also a psychology of investing. When you get a bulk amount of say Rs10 lakhs as a bonus, promotion, sale of an asset etc, the first thing you would want to do is invest (if not spend). Again, that’s a bad idea.
When you get a bulk amount like that, the first thing you should do is park it in the liquid fund and then think with a cool head. Do not hurry into investing or spending, take your time. Out of my experience, let me assure you one more thing — none of the financial products need to be hurried into. It is better to get the decision right than to time the decision, unless of course, it is a lottery ticket.
That’s all for today and I hope this article helped you with a fresh new perspective. You should consider sharing this with your friend or relative who could benefit from this.