Tackling low savings rate: Automate with SIPs, retirement accounts

Control lifestyle inflation and avoid excessive reliance on debt by automating savings, budgeting better, aligning investments to goals and tracking progress regularly

A recent survey conducted by Marcellus Investment Managers in collaboration with Dun & Bradstreet India highlights that even those with good incomes struggle to save adequately: 43 per cent of respondents were found to have a savings rate of less than 20 per cent of their post-tax income. The survey covered 465 respondents from metros, tier-1 and tier-2 cities, all aged above 30 years and earning a post-tax household income of over ₹20 lakh annually.

Lifestyle inflation, high fixed costs

Lifestyle inflation is a key reason for the low level of savings. As incomes rise, people upgrade their lifestyles. “Premium education, luxury travel, high-end real estate, and social obligations create a lifestyle treadmill that is difficult to break,” says Vaibhav Porwal, co-founder, Dezerv.

 

Homebuyers fail to distinguish between needs and wants regarding the size of their house and furnishings. “Every increase in floor area or size adds to the budget,” says Girish Lathkar, partner and co-founder, Upwisery.

 

Many earn poor returns on their investments. “One reason is that a major part of their wealth is tied up in real estate,” says Mohit Gang, co-founder and chief executive officer, Moneyfront.

 

Some lack knowledge of investment options. Others fail to budget and control expenses. Rising health care costs and caring for the elderly further strain savings. 

Ideal savings rate

Gang suggests that those with income above ₹20 lakh should aim for a minimum savings rate of 30–40 per cent of their post-tax income. Younger individuals in their 20s should target a higher rate, given their lower fixed expenses. “Those with children’s education or business commitments may temporarily lower their savings but should make up for it later,” says Porwal.

Steps to enhance savings rate

Automation of savings can make the exercise effortless. “Set auto debit for systematic investment plans (SIPs) and then begin spending,” says Gang.

 

Contributions to retirement plans like the Employees’ Provident Fund (EPF) and National Pension System (NPS) can also help automate savings.

 

Controlling expenses comes next. “Categorise your expenses into essential, lifestyle, and discretionary buckets and review them regularly. Most clients are shocked to find that 40–50 per cent of their spending falls in the discretionary bucket, which they can optimise,” says Porwal.

 

Align investments to specific goals—children’s education, retirement, emergency reserves, and wealth creation—to make them feel purposeful. “An investment policy centred around life goals can help one stay the course,” says Subodh Kaistha, managing director, relationship management, Waterfield Advisors.

 

Work with chartered accountants and wealth managers to maximise tax savings, and consider using structures like trusts and family offices.

 

Track progress towards goals every three to six months. Having a financial adviser and regularly reviewing progress can help. “It should preferably be a Securities and Exchange Board of India (Sebi)-registered investment adviser (RIA), who can offer unbiased advice,” says Kaistha. 

Mistakes to avoid

Over 50 per cent of respondents had loans. Individuals must stop funding lifestyle upgrades through debt. “They must build a financial cushion before taking on a mortgage,” says Rohit Beri, chief executive officer and chief investment officer, ArthAlpha.

 

Another mistake is trying to match peers’ lifestyles. Many affluent young people are first-generation wealthy. They have limited financial literacy, lack quality financial guidance or role models, and often fall prey to mis-selling. This makes them hesitant to invest in high-return assets like equities. “Direct meaningful savings into a strong equity-oriented portfolio to ensure long-term wealth creation,” says Beri.

Build emergency reserves

 

*  14% of those surveyed lacked emergency reserves

  *  Having six months of expenses is essential; entrepreneurs and those with large loans should have at least 12 months of reserves

  *  Without an emergency fund, individuals may have to rely on high-interest credit cards or personal loans during crises, worsening their debt burden

  *  Absence of emergency funds can also prevent regular investment

  *  Keep this money in fixed deposits or liquid mutual funds for easy access