Do your savings fall short of target?

Are you satisfied with the amount you save every month? If your answer is no, you are not alone. Most of us believe that we should save much more than we currently do.

This is more than just perception; your actual savings could be short of that required to meet your life goals. The question is: what are you doing to manage this gap?

Personal savings gap is different from investment value gap, a concept we discussed earlier in this column.

Personal savings gap refers to the difference between the required and actual savings. Investment value gap, on the other hand, refers to the difference between the required and actual investment value at the end of an investment horizon. Investment value gap primarily results from lower-than-required returns on your portfolio. Personal savings gap occurs due to two typical reasons. One, you have liberal spending habits. And two, you are, perhaps, pursuing too many life goals.

Consider your spending habits. Your savings is a function of your income and spending decisions. The higher your monthly spending, lower your potential to save.

So, one way to reduce your personal savings gap is to spend wisely. Pursuing too many goals, on the other hand, could lead to savings gap even if you follow strict spending rules.

This is because each goal requires you to save certain amount of money to accumulate the required wealth at the end of the investment horizon.

You may have constraints in saving to meet all your life goals. Why? For one, you cannot easily increase your income.

For another, you have to necessarily spend a significant portion of your income to maintain your current lifestyle.

So, how should you reduce your saving gap and improve the chances of meeting your life goals?

You should address both factors that lead to your savings gap — your spending habits and pursuing too many goals. First, self-audit your expenses and divide them into two categories — discretionary (non-essential) and non-discretionary (essential). Then look closely at non-discretionary expenses that constitute 5 per cent or more of your total expenses.

Next, look at discretionary expenses. You should attempt to cut 5-10 per cent of your total expenses based on your audit — preferably more from non-discretionary expenses.

After all, discretionary spending gives you more pleasure than non-discretionary spending! Second, reduce the number of life goals you pursue. This requires a two-stage approach.

In the first stage, select only the life goals that are needed to maintain your lifestyle — retirement living, child’s marriage expenses, and so on.

You should eliminate goals that are aspirational — taking exotic vacations or collecting artefacts, for instance. Next, prioritise your lifestyle goals and stick to three-four such goals.

Third, see if you can extend the time horizon to achieve any of your non-priority (aspiration) goals. If yes, you can pursue three-four priority (lifestyle) goals and one-two non-priority goals. How? When you extend the investment horizon to achieve a life goal, you have more time to let your investment work for you. This, in turn, can reduce the amount you need to save.

You or your spouse may resist the idea of reducing monthly expenses or dropping some life goals.

But you do not have to cut your current or future standard of living; we just want you to marginally reduce some expenses without compromising on your quality of life. If you do not want to reduce expenses or drop some aspiration goals, you have essentially one choice to improve your savings — increase your income!

The writer is founder of Navera Consulting. Feedback may be sent to portfolioideas @thehindu.co.in