Credit Cards

3 Ways To Save Money When You Gain Financial Independence

When you become financially independent for the first time, you can easily waste a lot of money on unnecessary expenses without even realising it. But with a little careful planning, you can plug this money leak without resorting to extreme penny pinching.

So you are fresh out of college and have a job offer in hand. Having your own bank account and spending the money on stuff that matters to you is a great feeling. That said, you may still be unsure of how to manage your money so that you don’t end up living pay cheque to pay cheque. For instance, a common mistake is to spend money indiscriminately without saving anything. Another mistake is to feel guilty about spending even a single rupee, leading to extreme penny pinching and In this article, we show you 3 ways you can cut down on expenses and save money over the long run. This way, you can save money but still spend guilt-free on things you love.

1. Find Ways to Save on Recurring Costs Like Groceries and Household Items

Groceries and cleaning products will be recurring monthly expenses when you set up your own home. While these recurring purchases are absolutely essential, you can always shop smart and save money on them. For grocery expenses, we recommend signing up for membership programs from stores like More Market, Big Bazaar and Big Basket. With the COVID-19 pandemic restrictions still in place, these stores give you the added benefit of home delivery. While some of these require an initial investment, it will pay off in terms of savings and other perks over time.

This table shows the different savings programs for More Market, Big Bazaar and Big Basket

You can also save more money by investing in a credit card which offers you reward points and cashback for grocery spends. You can start by checking out top grocery credit card, and make some major savings on grocery expenses. For instance, Kotak Mahindra Essentia Platinum Card offers you 10% value back (capped at INR 500 per month) on any purchases greater than INR 1500.

2. Watch Out for Credit Card Fees & Interest

When you become financially independent, your bank will likely offer you a credit card when you open your first savings account. A credit card is like a double edged knife. If used right, they let you make purchases and save money. But if misused, they will bury you under a ton of debt. This is because credit cards let you “borrow” money from a bank to buy goods, with the expectation that you will return this money back to the bank before a set date every month. If you miss payments, they get to charge interest on the loan and you'll end up paying more than the amount you actually spent.

However, besides not paying your credit card bills on time, there are other ways you can lose money with a credit card. First, there is the minimum payment trap. This is typical for new credit card users who are tempted to just minimum amount per month despite the size of their credit card bill. While you may be tempted to just pay the minimum amount due and consider your job done, you should know that you will get charged interest on the remaining balance. One of the fastest ways to accumulate credit card debt is to only pay the minimum monthly payment while letting these interest charges accumulate, since the average interest rate on credit cards is a hefty 41% .

If a Rs. 50,000 balance is not paid down quickly, an extra 10% would be owed after just 3 months, while waiting a year would cost an extra 56%.

The second way you can lose money is through the Annual Maintenance Fee, which is the yearly fee that a bank charges you to use their credit card. Typically, this fee is waived if you spend a certain amount per year. For instance, if the annual maintenance fee is INR 1000, they may offer to waive it off if you use the card to make purchases of INR 10,000. Unless you know your typical spending is higher than the minimum amount required to waive the fee, then the card will just end up costing you money. You can try negotiating with your bank if you really like the perks the credit card offers but you don't want to pay the annual fee. Otherwise, we recommend switching to a card that doesn't charge an annual fee.

3. Consider Long-Term Savings Options

In addition to saving money on purchases, you should also save money for the long-term. This can be done in a number ways from automating a portion of your salary to go into your savings account to putting money into fixed deposit or recurring deposit accounts. Fixed Deposits (FD) are a type of time bound deposit. You put in a lump sum of money into an FD for a set duration, say INR 10000 for 12 months. At the end of that period, you can withdraw this money plus the interest that the bank pays you for it. While you cannot usually withdraw money before the deposit duration ends, your money is essentially earning interest for you instead of just lying idle. You can set it up through internet banking with most banks once you have a savings account with them.

A Recurring Deposit (RD) lets you deposit a small amount every month into an RD account. On a fixed date every month, a set amount of money is debited from your savings account and deposited to your RD account. The best part is, with this deposit happening automatically, you don’t have to put aside a huge chunk of money for a one time investment. So, if you open an RD with a deposit duration of one year and a monthly investment of INR 1000, at the end of the year, you will get back INR 12,000 plus interest. This interest varies from one bank to another but is typically 6.5 - 8.75% depending on the deposit duration and the amount invested. An RD is a low risk, automated investment method that helps you get into the saving habit.

Future Savings Ideas

While these should get you started, you can also explore more options which can give you better returns on your investments. Mutual Funds, Unit Linked Insurance Plans(ULIP) National Savings Certificate(NSC) and Public Provident Funds(PPF) are all options that you can look at once you are comfortable with investing and managing your finances. You can also consider different credit cards to increase savings on your purchases. Since credit cards also offer different rewards on different categories like travel, groceries and dining, you can start finding ways to save on your purchases by tailoring your credit cards to your spending habits. Regardless of the method you choose, saving money is one of the best ways to set yourself up for financial success.