Tech is the key to scaling, virtually anything.
One of the key ways tech allows scaling is through automation. We are living in an era, where we can utilize modern apps and put our savings and investments on autopilot so they keep growing with or without our attention.
I have been automating major aspects of my business and life for quite a long time.
Ever since I started making money, I’ve been finding different ways to optimize and automate my investments, savings, and expenses. Even budgeting.
The benefits of automating your finances are many, but it all comes down two three things:
- You won’t have to invest in different assets manually every month. It will happen automatically. This also means you remove any chances of not investing in any given month or overspending your budget. Plus, you will be diversifying enough to reduce volatility from your portfolio significantly if you follow this guide.
- You will “always” sync with or outperform the market – because you won’t be trying to time and beat the market.
- No need for willpower or discipline. You can enjoy your life, do what you love instead of worrying about the market. It won’t need your attention or input.
In this article, I’m going to walk you through a simple step-by-step automation strategy to automate your savings and investment routines.
I’ve kept this guide super simple. Even if you have zero knowledge, less than an hour of discretionary every week, you can implement this whole automation and get your finances right.
I can virtually guarantee you will be able to save and invest more than you did before by following this strategy.
We are going to fix the fundamentals first.
Step 1: Fix Your Bank Account
There are a lot of gimmicky bank accounts offered by private banks in India.
I’m talking about the likes of HDFC Classic Or Kotak Privy League.
These bank accounts require you to maintain a high minimum-average balance, either monthly or quarterly. Which is absolute nonsense when you can get “better” without leaving a pile of cash.
Apart from ICICI Privilege, I wouldn’t recommend opting for any high-net-worth bank account in India.
Especially HDFC classic.
If you are still obligated to keep any more than 25,000 in your bank account, you need a change.
Because I don’t want you to feel scared spending your own money or paying hefty fees if you choose to spend it.
So, in this first step, we will choose a low-cost bank account, but not zero-balance. Often, zero-balance accounts come with hidden fees, so make sure you’re not opting for Kotak 811.
I recommend opting for:
- IndusInd Indus Privilege Savings Account – probably the best account, will no hidden charges in India.
- ICICI Gold Privilege – If you want at-home banking, priority service at the branch, no charges on transfers, ATMs, checkbooks, and DD, this is the best account. You can even get Payback points on Debit Card expenses. No forex charges.
- Neo bank – Fi.Money. Really, if you are someone who’s salaried and under 30, Neo banks will provide you with the best service, no charges whatsoever, and tons of cashback/reward points.
The three bank accounts above – won’t charge you for each IMPS transaction, forex transactions, ATM maintenance feel, and other hidden charges such as fees for your card getting denied at an ATM. With ICICI Bank, your relationship with your bank over time will help you get special loan rates as well.
Kotak Mahindra Bank is also a great choice, but they levy certain charges that don’t make any sense. And they keep adding new ways to charge customers.
If you’re using a PSU bank, such as PNB or BOI as your main bank account, switch to a better bank like ICICI, IndusInd, or even Kotak.
You’re actually giving away your money to NPA borrowers for free.
PSU banks have outdated apps (apart from SBI), very bad customer service, and no benefits of being a good customer (again, apart from SBI).
There are absolutely zero reasons to opt for high monthly average balance bank accounts.
Once you’ve fixed your bank account, let’s move on to the first step of automation – creating an emergency fund.
Step 2: Your Emergency Fund
A situation like the COVID pandemic is a great example to explain the concept and importance of an Emergency Fund.
Let’s say you are a salaried employee and when the lockdown due to the pandemic in 2020 happens, you lose your job.
When you don’t have an emergency fund, and you lose your job, you are f’ed. That’s how I’d put it.
However, if you have an emergency fund, you can swiftly keep up with the utility bills, pay rent, and pay for other important stuff – while looking for other ways to start making money.
And it’s important to understand, your investments in this scenario are not considered your emergency fund. They are affected by the market. Some of your stocks are down more than 60% and your mutual fund might not allow withdrawals due to high sell-off numbers.
Plus, when you take long-term investment bets, you don’t want to make money out of these assets in the short term. You’d end up taking losses and paying taxes on top of it.
That’s just one simple example of why an emergency fund is essential. You can think of a hundred different scenarios where you need money, right now and if you don’t, things might get ugly.
An emergency fund, by definition, is a sum of money you keep aside where you can access it in an instant. You should take money out of your emergency fund only when you really need to, and never for anything else.
You don’t start investing until you have an emergency fund.
Ideally, you would read recommendations for liquid mutual funds as a safe place to park your emergency funds.
One of the reasons I wouldn’t recommend choosing Debt Funds as an emergency fund, it’s they aren’t as safe as your bank, though they are very well protected against volatility and market shifts.
And the whole idea of having an emergency fund is getting guaranteed access to the funds when you need it. Not in a day, or 48 hours, right now.
That’s why we are going to keep our emergency funds in a savings account.
Why a savings account?
You can automate the transfer of funds to grow your emergency fund. You get the security of a bank. You earn interest on top of it, plus, it’s easily accessible without any charges. There are no exit loads, gains tax, or 48-hour waiting periods to access your funds.
The most important part – you need discipline. You have to make sure you don’t touch your emergency fund unless you absolutely have to.
Keeping your emergency fund in a savings account also makes it easily accessible. So easy that someone with no principles and strong values will constantly withdraw from their emergency fund.
You should not do that.
How much should you deposit in your emergency fund every month?
There is a way to calculate how much money you should have in your emergency funds.
Here’s an online emergency fund calculator I’ve got built for you.
To calculate it, first analyze how much is your monthly expenditure. An approximation would work. You don’t have to be specific.
Let’s take ₹ 100,000.
If my monthly expenses are ₹ 100,000, ideally I should have enough money in my emergency fund to cover up to 6 months of expenses.
I need at least ₹ 6,00,000 in a separate savings account as my emergency fund.
I’m more conservative, so I’d probably like to have at least ₹ 1,200,000 in my savings account. Just to be on the safe side and besides, I love to have cash in hand.
This love of cash was one of the main reasons I was able to capitalize on the March 2020 crash – getting deals like ₹690 on average for Infosys. If I didn’t have cash, it would be a once-in-a-decade opportunity that I had missed.
So, even if you hear Ray Dalio saying cash is trash, remember he gets a big pool of cash every quarter to invest. He’s cash-rich. And you should be too.
How to Setup Your Emergency Fund
I recommend choosing a savings account in a bank like:
- ICICI – Best option, you can use iWish goal-based deposit scheme.
- Kotak Mahindra Bank – High-interest rate, since you won’t be using your emergency funds for day-to-day transactions, you don’t have to worry about their charges.
If you are opting for a Kotak Savings Account to park your emergency fund, create a standing instruction from your salary account or your business/current account to transfer at least 10% of your income to your emergency fund account.
You only have to do this until you have enough money in your emergency fund to support you for 6 to 12 months of crisis.
If you are opting for an ICICI bank saving account, choose the minimum balance account. You don’t need a fancy account for this purpose. It makes no sense to pay a fee for maintaining a minimum balance.
The best part of selecting an ICICI bank savings account is the iWish deposit scheme.
This is the perfect place to park your emergency fund. iWish deposits help you save funds for short to mid-term goals.
Since it’s a deposit scheme, you also get the advantage of earning interest on your emergency fund.
And it’s a short-term, no-commitment scheme, so you won’t be paying any fees with withdrawals from your iWish account.
Setup an iWish deposit account by logging into your ICICI net banking dashboard.
Name your iWish deposit “Emergency Fund” and automate your monthly deposits here.
Again, start by transferring 10% of your income to this iWish deposit account. With 10% of your income going to this account, you will be able to reach your emergency fund goal rather quickly.
If you can fund your entire emergency fund in one transfer, do it. And move on to the next step.
Or, keep depositing every month until you get there.
Once you’ve fixed your emergency fund, let’s move on to the third step of automating your finances.
Step 3: Setting Up Your Retirement Funds + Let’s Save Some Tax!
The next step is fixing your retirement funds.
Saving for retirement has two main benefits:
- You build a corpus of wealth for the stage of your life when you’d just want to relax, kick back and chill somewhere. If you are salaried, this is as important a financial step as building an emergency fund. Because you won’t be working when you’re in your 60s.
- You get to save tax.
The sooner you start contributing towards your retirement fund, the more wealth you’ll accumulate when you reach your 60s.
To give you context, I started my NPS account as soon as I hit 18 (I’ve been making money online since I was 17). Even before I got my Demat account.
If I had started my NPS account just two years later at age 20, I’d have lost a few crores from my retirement corpus.
There are three retirement funds I’d recommend for everyone:
- NPS – Super important.
- PPF – Completely tax-free contributions, interest and maturity amount.
- ELSS mutual funds – High returns plus little extra tax savings.
Out of all three options above, I recommend. starting with an NPS account, then a PPF, and finally investing in ELSS mutual funds.
An NPS account (National Pension Scheme) is a sovereign-sponsored initiative for citizens like you and me to start a retirement fund. An NPS works like a normal pension plan – you invest till you are 60 and once you reach there, you get paid an annuity every month.
How much you’ll get paid every month in the form of a pension when you reach 60 years of age, depends on three things:
- How soon do you start contributing to your NPS account?
- How much do you contribute in a year?
- How much return do you get on your NPS investment?
So start contributing to your NPS account today and watch it grow every year.
How to open an NPS account?
I recommend opening your NPS account via your bank, especially if you are an ICICI, IndusInd, Kotak or HDFC customer.
Else, you can also opt for an NPS account by visiting the official NSDL website here. (Direct Link to NPS Registration).
There are two tiers of NPS:
- Tier 1 – This is the one you will open to get pension and tax benefits. Your money is locked until you reach 60 years of age. You can withdraw up to 25% of funds for special occasions like marriages after 3 years. At 60, you can withdraw up to 60% lumpsum.
NPS Tier 1 is eligible for a tax deduction on contributions up to Rs 1.5 lakh under Section 80 C and an additional Rs 50,000 under Section 80 CCD (1B) of the Income Tax Act, 1961.
- Tier 2 – This is a voluntary account. You don’t get tax benefits or pensions. Basically, it allows you to invest in NPS-linked funds but without any benefit if NPS tier 1. And you can withdraw your funds at any time without any fees. Your funds aren’t locked.
There’s another variation of Tier 2 which is a tax saver, but we are going to ignore it altogether. An ELSS fund makes more sense over it.
Once you open your NPS account, you will need to choose a fund manager. I recommend choosing either one of these:
- HDFC – What I’ve chosen personally.
Then, you will be asked to choose between three investment options:
First, choose the Auto Option.
Forget about Conservative.
Then select moderate. For most investors, this is an optimistic yet safe approach.
However, you could also choose Aggressive, since your NPS fund is managed by experienced fund managers, and we are looking at decades for these investments to grow, the risks are comparatively low.
A few years back, investing in NPS was super difficult. Like really really challenging. You have to login into your PRAN account, fill up these forms, pay via debit card or net banking while paying a small transaction charge as well.
Now, it can all be automated.
With your NPS account, you get a virtual deposit account as well. It’s called D-Remit. With this virtual deposit account, you get to contribute to your NPS account via bank transfer and get same-day NAV.
This means you can set standing instructions through your bank account to contribute towards your NPS account every month, automatically.
How to get your virtual D-remit NPS account details?
It would take about 24 to 48 hours for you to get your D-remit account details in your email.
Once you get that, create a standing instruction to contribute at least 5% of your income every month. So if you are making ₹ 1,00,000/month, contribute ₹ 5,000 every month.
There is no limit on how much you can contribute to your NPS account.
But you can only save up to ₹ 2,00,000 in tax deductions.
If you don’t have anything like a car loan or a home loan where your monthly EMIs are more than 30% of your income, you can contribute 10% of your net income towards NPS.
Still, I’d recommend 5%. I’m not taking a conservative approach.
We’ll be taking a more investment-heavy approach so that we can generate and spend some of that wealth today, not when we are senile.
We’ve already set up a retirement fund and an emergency fund, so now it’s time for us to take risks.
Over the last decade, NPS funds have performed relatively well over other retirement and pension funds, giving about 8 to 10% returns annually. Since your money is invested in equity as well, you’ll get an occasional 20%+ interest as well, but you can expect a CAGR or anywhere between 8% to 12% in 10 years.
PPF being least risky will earn you just 7.1% interest and you won’t be able to contribute more than 1.5 Lakhs in a year.
But it’s a very safe option to invest your money for the long term and save tax. You can keep renewing your PPF after 15 years for every 5 years for as long as you want. And all of this money is tax-free. You get to save on taxes today and in the future.
You can open your PPF only via your bank. Log in to your internet banking account and you should see an option under the investments section to open a PPF account. It varies from bank to bank.
You can create standing instructions to contribute to your PPC account every month.
Max out your PPF every year – it only allows you to deposit up to ₹ 1,50,000 every year.
When you max this out, you save this game amount in tax deductions today, and in the future when you withdraw it.
We will look into ELSS mutual funds when we set up your investment account in the next part.
That’s it! – Congratulations on finishing part 1 of automating (more fixing) your finances!
Now that you have a great bank account that doesn’t hijack your money, an emergency fund for getting you out of tough times, and a retirement fund automated to grow, the second part will focus more on budget automation, and managing your debt.
If you have any questions, let me know in the comments.
It’s an excellent article on financial planning particularly for uninitiated. I just add some points which I follow and might help others
1. Using two savings a/c of same bank … park all income and regular investment from one account and use ATM card of another account for cash transaction or any online expense. You can sweep in to your expenditure account whenever required.
2. In my opinion the App and Internet banking features provided by ICICI is the market best in India.
Thanks for adding value!
Great article, thanks for sharing your knowledge.
can you also share how to track your daily expenses? Personally, I use Walnut app.
I use Wallet by BudgetBakers. This was supposed to be the theme of part two – a detailed dive into Wallet because it’s a robust little expense tracker with so many features to automate budgeting and tracking balance.