Personal Finance Beginner

What are savings, and why are they important?

What are savings

Key Takeaways

  • Saving money is important so it should determine your current and future expenses to some extent.
  • Before you zero in on the savings rate, it is always good to account for inflation.
  • There are a large variety of savings accounts available now, so it makes sense to evaluate them and make a choice as per your goals.

Most of us have heard the saying “A penny saved is a penny earned,” but how many can claim that we fully understand and live by it? Not everyone realizes that saving money is not an option and but a necessity. Too many end up living paycheck to paycheck, and some save, but not enough.

Join us as we try to change that as we try to get you to look at savings in a fresh light and discuss what they can do for you. Let’s try to get into a saving mindset and learn about some instruments everyone could use.

What are savings?

We all know what savings mean. They are the unspent portion of earnings. It’s such an everyday term that you may wonder why bother defining it.

Well, we should, because sometimes, when a term becomes a part of our everyday life, we begin to take its meaning for granted. When this happens, it is much harder to recognize if we are understanding the term wrong. And with a term like savings, you may end up not saving enough simply because you have a faulty understanding of the idea.

That’s why most of us save after spending. We often think of savings as the amount that’s left behind after all expenses are covered. While that makes sense as a definition, the mindset behind it is not useful to have.

Saving money should not be treated as an option, or something you do with what’s left. 

Saving money should not be treated as an option, or something you do with what’s left. Your monthly, weekly, quarterly, or even yearly savings should not depend on your expenses. Instead, it should be the other way around. You should try and only spend the amount that’s left after you have set aside what you want to save for that period of time.

To put in the words of Warren Buffet, one of the world’s wealthiest, “Do not save what is left after spending, but spend what’s left after saving.”

But how do you decide how much is the right amount to set aside each month?

How to calculate savings and savings rate

It’s much easier to learn to do the math when you’re working with an example. (Remember all those school math problems?) So, let’s start with one.

Say you have a monthly disposable income (what’s left after taxes) of ₹50,000. You know that each month you have the following expenses:

  • Rent: ₹15,000
  • Groceries: ₹10,000
  • Credit card dues: ₹5,000
  • Utility bills: ₹5,000

The expenses add up to ₹35,000. That leaves you with ₹15,000, which you could add to your as savings. It’s important to factor in all of your past expenses to realize how much you can aim to save going forward.

As for the savings rate, saving ₹15,000 means that you have managed to save 30% out of every ₹50,000 earned. That 30% is your monthly savings rate.

How to go about saving money

The surplus from disposable income is the part we usually save. You should try to ensure you have that surplus in three forms:

  1. Liquid cash: You can save money as cash or any cash equivalent that’s liquid enough (can be converted into cash with ease), like a bank deposit.
  2. Zero-risk instruments: Choosing zero-risk instruments for a significant part of your non-liquid savings is wise. They are preferred because they usually offer minimal returns.
  3. Investments: Investments can help you grow your savings. They are fundamental if you want to stay one step ahead of inflation.

While deciding how to allocate your resources to each of these types, remember that money is usually saved in cash form. This is so because cash is the most liquid asset; it lets you purchase things immediately. Cash is therefore useful to have during emergencies.

But, remember, cash set aside for emergencies shouldn’t constitute the bulk of your savings. Ideally, it should only be a small sum. Cash is handy but its value could depreciate while lying idle. The cost of products and services, on the other hand, will only get dearer. That’s the reason why you need to put your money to work with zero-risk instruments and investments, in that order.

Why savings are important

To show you why savings are important, let’s dial back to the example we discussed earlier. Suppose you do your ₹50,000-income job for a year, saving ₹15,000 each month. Now after a year, you have almost ₹1,80,000 in your account. If your company suddenly decides to let you go, you could find yourself with no current disposable income. Meanwhile, your expenses will remain the same. Your savings will keep you covered for at least a few months in such a situation.

That’s why savings are important. The more you can save, the better is your backup. Savings are meant to save you, if and when things go downhill. Like if there is an unanticipated job shift, personal emergency, or simply anything urgent.

But it is also important to think of savings beyond emergency scenarios, too. You need to save to plan for the big things in life: education, marriage, kids, retirement, and so on.

Having money is also a way of generating more money. Saving money is going to be crucial if you want to stop living from paycheck to paycheck, if you aspire to have a steady source of income even during your golden years, or if you simply want an extra source of income to live a better lifestyle. That’s why you should use the right instruments or accounts to save your money. Read more on this in the section below.

Types of savings accounts

Not all savings accounts are alike. Below are a few options. Pick what suits your needs best.

1. Traditional savings account

A traditional or regular savings account is one of the main banking products offered by almost every traditional financial institution. These accounts are meant for individuals who want to earn some interest on their savings.

Regular savings accounts offer interest on savings. They often come with caps like minimum account balance, a fixed number of ATM withdrawals, and so on.

Such accounts are easy to create but often have maintenance fees associated with them.

2. Checking accounts

A checking account allows unlimited withdrawals and deposits, unlike savings accounts which sometimes place a limit on them. The advantage of this type of account is that you need not pay much in monthly fees. In addition, you can still use debit cards and write checks, owing to the massive fund accessibility and liquidity on offer.

3. Money Market Accounts (MMAs)

These savings accounts offer the best of both checking and regular accounts. This means that you get decent interest rates without compromising on money accessibility. Online banks, credit unions, and even brick-and-mortar setups offer MMAs.

However, MMAs often require high initial deposits. Also, tiered interests might be there, with higher balances returning better rates. And almost always, MMAs have monthly maintenance fees associated with them.

4. High-yield accounts

If you want your savings to fetch the best possible interest rates, you should consider high-yield accounts. These accounts emerged after the onset of online banking. The account holder usually will need to pay hefty monthly maintenance fees.

5. Certificates of Deposit (CD) accounts

CD accounts also deliver higher interest rates on your savings. However, access to cash might be limited for a period, making it a less attractive option if you want to factor in the possibility of short-term emergencies. Deposit terms can vary from 30 days to 5 years. Penalties apply for premature withdrawals.

6. Auto sweep accounts

Savings accounts with “auto sweep” functionality are a great way to beat inflation. Accounts with this option are like regular savings accounts that also double up as a fixed deposit. The moment your account balance exceeds a preset limit, the surplus is sent to the deposit part of the account, thus generating higher returns for you.

7. Speciality savings accounts

These are bespoke or rather tailor-made individual accounts. They are tailored to the goals of the user. Specialty savings accounts can be used by kids or students, and may even be created by the organizers of key events. The interest rates are higher, and the withdrawal caps are set differently, as per goals.

Many companies are currently offering specialty accounts that allow users to save for the new iPhone.

Tempting as all the options discussed above are, it is important to weigh the pros and cons of all accounts before proceeding with one.

How much should you have in savings?

There’s no hard and fast rule as to how much anyone should save. But it may be a good idea to err on the side of caution and go beyond the average savings threshold. As of March 2022, the US has a 5% personal savings average. Anything over 5% seems like a good bet.

However, remember that before you commit to a figure, it is important to consider your spending habits, most important expenses, liabilities, loans, and inflation. For now, we recommend flexible savings plans—one that changes with evolving existing financial scenarios.

Barring a few unavoidable and generic expenses, spending money depends a lot on the psychology of the individual. And if expenses are person dependent, why shouldn’t savings be? The amount to save, the choice of saving account, and even the calculations would and should never be the same for two people.


What do you mean by savings?

Savings refers to setting aside money that is not required for current consumption. It is income that remains after personal taxes and expenses have been accounted for, providing funds that can be kept in safe assets to grow through interest and be available for future spending needs.

What is saving in short answer?

Saving is setting aside money you have earned rather than spending it all. It involves not consuming all disposable income in the present so that the money can be kept for some future financial goal or unexpected event. This foregone present spending allows savings to accumulate interest over time.

What are savings in a bank?

Savings in a bank refers to money deposited into a banking account that accrues interest over time, is protected from inflation and market risks, and remains easily accessible for future spending needs or financial goals. Bank savings provide security, some income, and liquidity.

What is saving and its benefits?

Saving means setting aside money for future use instead of spending it now. The key benefits of saving are having funds available later for emergencies, big purchases, retirement, financial goals, or unexpected needs without having to borrow. Saving also earns interest and protects against inflation erosion.

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