8 Dec 2014

What Counts As Savings?

A personal finance blog talks about saving and being frugal all the time. Are savings and investments the same thing? Is buying an LIC policy saving? Are fixed deposits considered savings? If you wanted to buy a gadget and bought the older generation to pay less, is that a form of saving?

I will answer all the above questions.
But first, I would like to say that this article was inspired by my friend John. Whenever John brings lunch from home, he claims he saved Rs.50 since he did not buy anything at the office cafeteria. John and I had a discussion as to whether this saving is real. Does it count if he ends up spending this money on something else?

Note: If you have not been introduced to my friend John, please read about him here

What counts as savings?
Money not spent and money that one can see at the end of the month in his or her account at the end of the month. Both conditions should be satisfied.

Basically, savings involve two steps. Let us take John's example again. The day that John packs his lunch from home he is saving Rs.50 but for it to be real savings, he should not spend it on anything else. When he does not spend it on anything else, he will be able to see the money in his account at the end of the month.

Is a recurring deposit (RD) a form of saving?
Yes! It certainly is! RD is a neat way of saving month to month. Let the money be automatically deducted the day your salary credits to your account. Be aggressive and make it to be as large an amount possible.

Is a fixed deposit a form of saving?
Yes, it is!

Is PPF/PF a form of savings?
PPF/PF will only be built if you save. However, I like to look at them as more than savings. These are retirement funds which are probably better termed as investments.

Mutual Funds?
I think mutual funds are definitely an investment. They do not merely count as savings.They are savings and give inflation adjusted returns when you invest for the long term. Please refer to my articles on mutual funds:
Basics of Mutual Funds
How Do I Start Investing In Mutual Funds?
How To Build A Portfolio With Mutual Funds?

I did not buy lunch from the cafeteria - does it count as savings?
Yes, it counts as savings as long as you can see the savings in your account

I invested in an LIC policy. Does that count?
Let us not confuse insurance, savings and investment. An LIC is definitely buying insurance and is NOT a form of savings.

But, I am saving tax by purchasing an LIC policy
Let us get our financial goals clear. We buy insurance to insure our family and near and dear ones. This is not savings. The tax that you save is an advantage but we do NOT buy life insurance to save taxes.

I bought an older generation gadget. I saved right?
If you needed a gadget and bought an older generation, less expensive model - you did the wise thing and saved.

When you do not spend on something - yes it is money saved but we have to be careful not to spend it on something else!

I hope John agrees with me!


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