This short post describes a possible savings target in India – 30% of post tax income. This is a companion post to the India version of Harold Pollack’s Index Card – Pollack’s Index Card: All the financial advice that you ever need – India version
The right Money Equation
Many young earners ask the question on what they should look to save. Savings is one of the three main variables in the Money Equation. This question comes from the simplistic version of the Money Equation:
Savings = Income – Expenses
The more appropriate equation is this:
Expenses = Income – Savings/Investments
There are finer versions of the equations that differentiate between different kinds of expenses. You can read a longer article in this blog post. This version expects that any earner should have an appropriate financial plan and invest towards it. The first step towards investing of course is to have savings – an investible surplus. Regardless of the approach, it is still useful, at least for young earners, to target a savings rate.
Save 30% of post-tax income – Reason 1
There is a simple reason to target 30%. Since around 2005, Indians have saved this amount of their income. One source of Savings Rate is from CEIC – CEIC data on Gross Domestic Savings. Typically, the Savings Rate is defined as the percentage of Gross Domestic Savings compared with nominal GDP. The Savings Rate hovered around 20% for many years between 1980 and 2005. Since then, the Savings Rate has climbed up and has stayed close to or above 30%. It should not surprise anyone that the Gross Savings are comprised of savings from all the individuals in the country. In other words, most Indians are indeed saving at this rate.
Save 30% of income – Reason 2
We are discussing personal finance in India. However, it is a fact that there is more history and data in the western countries on matters related to personal finance. In the US, depending on who you ask, you are told to save between 10% to 22% of your income just for retirement. You can read this recent article for a study with some numbers and suggests a rate between 15% and 22%: Retirement savings rate target for millennials In India, the financial goals include more requirements – college education for children, etc. So it is easy to extrapolate to a target of 30%.
Save 30% of income – Reason 3
This should be the most important reason, and the only reason that you need. It is based on the specific goals that you have and the investment required to achieve that. Since it is personal, it is difficult to give a common guideline. It would be very informative to go through the financial plans of many individuals and abstract out the savings rate from these plans. The author would undertake an assignment to look for such data sources. The reader can easily get this information for themselves – you just need to create the personal finance plan for you.
- Pollack’s Index Card: All the financial advice that you ever need – India version
- Harold Pollack’s Index Card
- The best financial advice on a single index card
- Extended Money Equation