Comprehensive guide to long-term savings

Savings help you to get the funds you need to achieve your goals. It doesn’t take too much effort to make your savings grow. With a simple savings goal, you can afford to buy almost anything you want. Saving goals work best when you think short term, medium term or long term. Short term goals might be buying a mobile phone, a medium-term goal might be buying a car and a long-term goal could be buying a house, something which sounds far away. If you put aside some money, every time you get paid, it will help you reach your goal faster. However, you need to plan your finances according to your goals.

Billionaire Mr Seth Klarman has said, “The single greatest edge an investor can have is a long-term orientation.” Since childhood we have been asked to go for a long run, which means that we have been asked to think about our future. Have you ever wondered why? Well of course, it brings security. Long term savings mean savings for a minimum period of 3, 5, 10 or 20 years. It could be for anything - running a successful business, retiring at the age of 40 or wanting to go on a world tour.

Below are some key features of long-term savings

1. Time Period- Long term savings give you enough space to understand the market trends and the features for different saving instruments in the long run. It is highly effective and very likely to result in meaningful wealth creation because it places your focus on things that really matter when it comes to saving. So, instead of thinking about day to day fluctuations of stock prices, you would focus on the company’s growth prospects or management competency. All these factors drive long-term returns.
2. Power of compounding- Albert Einstein has described compound interest as the 8th wonder of the world. Compounding is a process in which the gains from an investment are reinvested to generate additional earnings over time. In the long run, the power of compounding works wonders. Compound interest helps our savings grow over the long term. Start saving early and see money multiply manifolds specifically in case of long-term savings.
3. Diversified Portfolio- Diversification allows your portfolio to grow well. In the long run, you can put your money in diverse financial products thereby reducing your risk and generating greater returns in the long run.
4. Risk- Risk is substantially covered in case of long-term saving options. The probability of risk is high in case of short-term savings due to rigorous fluctuations in a small span of time.
5. Beats Inflation- Savings with a longer time horizon, help you beat inflation as time joins hands with compounding, thereby enabling you to maximise your wealth.

Long term savings instruments

Below table describes some effective long-term saving instruments:

Critical tips for long term savings

• Long term saving is simple but not easy – The most important ingredient of long-term saving is having self-discipline. Picking an instrument and investing can be learnt with a lot of data, books and material available on the internet, but self-discipline on saving every month cannot be learnt or taught. This is something which you need to develop from within.
• Long term saving is not buy and pay investing- We all might have come across a situation wherein the waiter asks us whether we would like to have mushrooms in our soup because mushrooms do not suit everyone’s tastes and likings. Similarly, all financial instruments might not suit everyone. You need to evaluate your choice of investment depending on your goals and risk appetite.
• Inculcate the habit of saving – Every increase in your income should be re-invested as this will help in achieving your goal faster and with ease. For e.g. Every annual bonus, every increase in salary or any lump sum amount like a matured Fixed Deposit which we receive should be re-invested.
• Follow the 50-20-30 rule- According to this rule, every month you divide your income in the following way: 50% is spent on living expenses like rent, groceries, etc. 30% goes for entertainment purposes like going out to eat or watching a movie and the remaining 20% will go right into your Savings Account. Doing this at the beginning of the month, will help you in understanding how much you will be able to save every month.
• Overreaction is harmful to your wealth- Avoid panic. Overreaction is a toxic habit for your investments. A small market crash or a temporary fall in interest rates should not bring a halt to your investment plan. For e.g. In this pandemic, stock markets across the world have fallen drastically as Covid was spreading, but with time we are almost back to pre-Covid times. Situations like these are temporary and you must adopt portfolio churning rather than stopping your investments.

As the popular saying goes, “Little drops make the mighty ocean.” Even if you cannot save much, your regular deposits plus the interest you get will fetch you a decent profit in the long run. Savings lead to financial comfort and security. So, in many important ways savings go hand in hand in having a happy future.

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