How much to save regularly?
Ever since his professional career began a decade ago, Fakhrul Islam has kept aside a portion of his regular income as a nest egg for rainy days.
Initially, he saved up to 30 per cent of his salary after meeting his family’s expenses.
This habit helped him a lot after his father recently became sick. Islam faced medical bills of about Tk 100,000 for his father’s treatment.
“I would have no other option than to borrow if I did not have savings,” said Islam, who works at an international non-government organisation (NGO).
“Without savings, it becomes very difficult for a family to face any sudden incidents,” he added.
Other than to meet emergency financial needs, keeping aside a portion of one’s income is also vital for ensuring solvency after retirement.
And so, like many others, the 32-year-old Islam understands the importance of savings.
“We work in NGOs and there is no sustainability of jobs, especially in many NGOs. There is often absence of provident fund, gratuity and end contract benefits,” he said.
Islam believes that one should divide his or her savings into two categories: one portion should be kept as emergency funds while the other should be saved in preparation for the long-term. He also suggested saving at least 30 per cent of one’s income.
“But I cannot maintain this as regular requirements for family expenses have increased,” he added.
Similarly, Rashid Topu, senior executive of mental healthcare service provider LifeSpring, stressed on the importance of saving 35 per cent of one’s income.
“It should be a must,” she said, adding that 20 per cent of that should be saved to meet long-term needs while the remainder should be used for emergencies and other short-term needs.
On the other hand, Hussain Ahmed Enamul Huda, assistant professor of the Department of Finance at the University of Dhaka, said there was no standard formula regarding how much one should save.
“It depends on an individual’s marginal propensity to save (MPS), risk aversion level, initial endowments, financial status and value of assets inherited,” he said.
The MPS is the proportion of a pay raise that a person saves rather than spending on immediate consumption.
People should save money for precautionary reasons and generally long-term investments are funded through a planned long-term savings.
“It is widely believed that people should at least have an emergency balance equivalent to six months of their living expenses. This emergency balance can be used to pay off medical bills or meet expenses for unavoidable circumstances,” Huda said.
Saving is key if someone wants to buy an apartment or a car, build a house or fund their children’s education.
“These are long-term investment goals and in order to fulfill them, one should prudentially set aside some money every month,” he added.
Huda went on to say that since there are hardly any structured benefits or defined contribution plans for people about to retire in the private and informal job markets, one should start saving early on in his or her career.
The private sector is the country’s main employer now.
About 95 per cent of the population is employed in the private sector while the other 5 per cent are employed in government services and enjoy pension benefits.
Only 8 per cent of private sector employees receive gratuity benefits, according to Finance Minister AMA Muhith’s budget speech for fiscal 2016-17.
On the question of how to save, Huda said assets can be broadly defined into four categories — cash, equity, fixed income and alternatives.
“Anyone starting his or her career should have a capital appreciation objective and they should allocate more funds in equity and comparatively less in fixed income and cash,” he said.
On the other hand, people in their consolidation phase are generally more focused on maximising their current income or “total return” and likewise allocate more funds in fixed income and cash, Huda added.