The importance of Saving and how to save.
One of the important pillars of Financial Freedom is knowing how to save when to save and why to save. We cannot attain financial freedom if we do not know how to save, because ultimately savings lead to investments and investments lead to financial growth and independence. It does not matter if we are career-oriented or business-oriented, savings is the ultimate route to financial success.
So what is savings and why do we need to save? In simple terms, saving is income not spent or deferred consumption. In order words, the total of your income is Expenditures plus savings. This, therefore, means that in order to increase your savings we need to reduce our expenditures. Not what we would like to hear, but that’s the bitter truth. As the saying goes you cannot eat your cake and have it and also there is no gain without pain. Like every other thing in life, we need to make short-term sacrifices to benefit from long-term satisfaction.
So why do we need to save?
• To handle uncertainties
‘Your mother is sick in the hospital and would be needing 1,000,000 frs for an emergency operation'. ‘We are sorry to inform you that we would have to cut down staff and unfortunately you are one of those we would be letting go’. ‘Dad you promised me I would spend my higher education abroad.
Are any of these phrases familiar? As an African, we know too well that the occurrence of these incidences is close to 80%. How ready are we for uncertainties in life? If we are fired from our job today how long can we cater for our needs before getting a new job? In a country where most of the population are not registered with an insurance policy , not to mention unemployment insurance, we need to rely heavily on a savings plan. In the paragraphs that follow , I will expatiate on how to save for an uncertainty such as such job loss. Other forms of uncertainties, could be family related problems, health and expensive and cumbersome school fees.
• Saves you from Debt
When uncertainties arise, the first thing that most of the youths will do will be to go into debt either liable to a financial house,to relatives, or to friends. However, this is a very bad practice as the best use of debt is for investment and not for spending. Going into debt to solve one’s problems is not the best solution as it’s repayment is always filled with lots of regret and bitterness and it is simply is not a good idea period.
When taking a loan it is important to take into consideration how much you are paying for the debt. In other words, how much is the interest on the loan? Imagine having to pay for interest on money that has not worked for you? For this reason it is considered best practice to go into debt for investment purposes.
• Helps you Invest
Apart from good debt, donations from friends and families , savings is one of the biggest sources of investment. As a matter of fact most financial houses will only be ready to loan you some money after proof of your propensity to save. If you need 10 million francs for an investment, the only way to convince someone to invest in your business is to show them that you already have 2 million francs for the business. Where does this 2 million francs come from? Your savings.
It is therefore imperative that we start cultivating a habit to save if we plan to invest or if we plan to attain financial freedom.
• Helps you plan and execute your short and long-term goals
Another reason why we need to save is to achieve our goals and investing is not the only goal we might have. We have life events such as weddings, building a house, buying that long deserved car etc . For some of us we are lucky to acquire a job at a relatively early stage of our lives. This gives us the opportunity to be able to save ahead of time for that dream wedding and for that dream house. I know that some of you may be asking yourselves, how much can I save a house in five years? How much can I save for a car in 3 years? These are all very valid questions, but also remember , we do not save to save but we save to invest to be able to realize our plans.
• Provides security for your family
We cannot underestimate the feeling of being financially secured. It is that feeling that makes you sleep well at night and get up from bed every morning relatively stress free. In simple terms, peace of mind is very important for our physical, psychological and emotional wellbeing.
The practice of Saving
Now that we have seen why saving is important,it is time to see how and what are the methods to save effectively. Before getting into that I would like to introduce to you the most important component of saving which is Budgeting.
A budget is a spending plan based on income and expenses. In other words, it is an estimate of how much money you'll make and spend over a certain period of time, such as a month or year. Having a budget keeps your spending in check and makes sure your savings are on track for the future. Because we are newbies to the world of personal finance ,it would be best to focus more on a monthly budget rather than yearly. Like I mentioned above, if we want to save or increase our savings , we need to reduce our expenses. The only way to do effectively reduce our expenses is to track them.
To be able to budget effectively I will introduce to you what is widely known as the 50/30/20 budget rule created by US senator Elizabeth Warren when she was a Harvard Bankruptcy specialist. This rule offers a simplified approach to budgeting for success:
1. Use 50% of your income on your needs, i.e. your fixed costs such as rent and utility bills. These are costs that you cannot change
2. Use 30% of your income on your wants, i.e. your variable costs such as going out with friends, subscriptions such as Netflix and internet, gym membership etc. These are costs that you can change.
3. Save 20% of your income.
In as much as this is a good golden rule to follow,it is also important to note that we all have different needs and different life goals we desire to achieve. For example we may discover that the total cost of our monthly needs do not amount to 50% of our income. In that case some of it can be added to savings. We may decide to reduce our spending splurge for a fixed period of time say 6months, some of that 30% can be redirected to our savings account. However the rule of thumb and the best thing to do will be to save at least 20%.
So what are the tips that can help us improve our savings:
• Getting out of Debt
There is no man more troubled than a man in debt. I am not talking of those who have borrowed money to invest in businesses and who actually use the profit from their businesses to steadily pay back these loans. I am talking to those who are owing money for things that do not bring us any money in return. The first thing to do on our journey to being better at saving is to start on a clean slate. This means paying all our debts. Most of us still owe huge amounts of money ,not because we do not have the money to pay back these loans but simple because we have chosen temporal gratification or ‘enjoyment’ over the repayment of these loans.
In order to save ,we need to pay back all our debts first. This means putting that into consideration when doing our monthly budgeting.
• Spend less
Now that we have paid up all our debts and are ready to begin our journey to financial freedom, we have to spend less. This brings us back to our budget (Everything revolves around our budget).
It is important to note that no two people can have the same budget, the fact that A who earns relatively the same amount of money like you do is able to travel every year for the summer holidays ,does not mean you can to. Perhaps A lives in a cheaper house thereby paying cheaper rent, maybe A would rather work out from YouTube than pay a gym membership, maybe A would rather bring home cooked meals to work than go out for lunch. Yes all these small amounts of money add up and then A would be able to afford a 4 days’ vacation in Ghana, Kenya or Zanzibar. What am I saying? We need to spend less money on the things we do not need now to be able to afford them in ten folds later. It is true they say you only live once, but you do not go broke only once so let’s be wise.
• Create a savings account with a standing order
It is not enough to have a budget and have the willingness to save. We need to be committed while doing so and one of the easiest way to do so is accountability. You can have an accountability partner who reminds you to keep to the promises or you can create a standing order at your local bank to help with that. Let’s say you have an account at your local financial house where your salary is being paid into every month, you can create a savings account with a standing order asking your banker to take a said amount of money every month from your current account and drop in savings account.
On the other hand if we are working an informal job we can create a savings account at micro finance at little to no cost and deposit this monthly savings inside. It also helps to have an accountability partner who will make sure you execute this plan monthly.
• Join a njangi
If you have friends, colleagues or relatives with whom you share mutual respect and share the same goals and objectives, this could be a great way to save money. It is easier to contribute to a fund when you know that it is an obligation. That way you do not default payment.
Now what you do with this njangi money when it is your turn is the big issue. That is why it is always important to have an end goal when joining a njangi. What do you want to use the money for? Once these questions are answered, and when the time comes for you to receive your ‘njangi’, you would be better equipped with knowledge on how to manage this money.
Having come to the end of our column today, it is important to always remember that we all want to save money. And whether it is by denying yourself that dinner date with your girlfriends, going for drinks with the guys or putting off that expensive car you wanted to buy, everyone has their own way to save. The above are just guidelines to help you define what is best suited for you.