Basic Guide to Stock Market for beginners
Welcome to the first chapter of our first module. As with all things, we are going to start at the very beginning.
Concept of savings
According to the dictionary, savings is the amount of money that is saved or leftover from income, after the main expenses have been taken out.
Simply put, it is the amount that we have managed to not blow on movies and outings with friends or the latest fashion accessories.
For example, imagine that your monthly income is Rs. 30,000. Out of that, the main chunk is spent on rent, which is about Rs. 12,000. With internet and utilities, this amount will rise to Rs. 15,000. Subtract another Rs. 8,000 on outings with friends and Rs. 2,000 on miscellaneous expenditure, and you will be left with Rs. 5,000, which is the amount of leftover.
This means, out of the Rs. 30,000, Rs. 5,000 is the amount that you have saved.
What is the importance of savings?
The main addition to the GDP of any country comes from the investment component. Now, this investment is the cumulative figure which represents the mobilised proportion of what individuals have saved. This is the savings definition economics has given us.
In 2019, the gross saving rate in India was 30.1%. This means, on average, individuals saved about 30% of their gross annual income. This marked a decline from the 32.4% saving rate in 2018. The savings rate in 2019 also marked the lowest rate in the last 15 years.
To put this value in perspective, let us compare this with the saving rate of other developing countries. In 2019, the gross saving rate in Brazil was 14.4% and in Vietnam, it was 25.4%. For Ireland, however, the gross saving rate in 2019 was 61%. This means people in Ireland saved more than half their gross yearly income.
Source: Computer and Enterprise Investigations Conference
For developing countries, the saving rate is a very important metric as this is the amount of money that is ultimately inserted into the economy.
If you use your saved amount to buy shares of a company in the stock market, this adds to that company’s equity capital. This amount is ultimately what influences the production and marketing decision of companies.
Thus, we see that individual savings are extremely important not just from the individual’s point of view, but also from the country’s point of view. The method of savings is not only a good habit to cultivate for a rainy day, but it also contributes to value addition for the economy.
Now, we have to understand that simply keeping the savings in our bank accounts is not enough to help the economy. We have to mobilise our savings or utilise it, by investing in the stock market, bonds, mutual funds, fixed deposits and others.
What are the different types of savings?
As millennials, we are all plagued by consumerism and an individualistic mentality. Now, these facets of our personalities directly contradict the buildup of savings.
So what do we do?
There are a few habits that we can adopt to make sure that we manage to keep the amount earmarked for savings, as intact until the end of the month.
Make a budget
Free-styling is not the best option when it comes to keeping track of your expenses. The human nature is prone to overspending, and to curtail that innate tendency, it is very important to make a budget and stick to it.
This will help you to keep track of what your regular expenses are, and give you a better basis for planning your month out. Make sure you set aside at least 10 to 15% of your regular income.
Record your expenses
This is a very good habit which will help you in life.
When we go on a shopping spree or any similar escapade, the last thing on our mind is to take an accountant along to keep track of how much we are spending where. But in the long run, this particular habit will help to not only give you an overview of where most of your optional expenses are concentrated, but the simple act of noting it all down will subconsciously prompt you to limit the non-essential expenses.
Set saving goals
The best way to save consistently is to set a goal for yourself.
The graph above shows an approximate break-up of how you can allocate your monthly income to ensure you have a complete budget for all your requirements.
One thing is important to understand here. Human beings are weak by nature. If we walk past a store which has the one item that we have been coveting for the past two months, and we have enough money to cover it in our bank accounts, very few of us will have the strength to turn away.
But don’t blame yourself, we are only human after all.
The ideal method to enforce regular additions to your savings account is to work towards a particular goal. You should set particular goals for both the short term and the long term. Examples of short term goals are vacations, concert plans, an extravagant purchase, etc. Long term goals can be the down payment for a car or a house, investment goals, retirement, etc.
Try out these methods and see the difference yourself. In the next chapter, we will talk about what the next step is after you have generated your savings.