“ Compound interest is the 8th wonder of the world. He who understands it, earns it; He who doesn’t, pays it”
Albert Einstein
Saving money is regarded as a primary pillar of wealth creation. It is the muscle with which you grow financially. One of the greatest benefits of saving is financial independence.
So, what is saving, and are there benefits to saving?
What is saving?
It is taking a part of your income and putting it aside for future use. Saving is an intentional habit, where every time you receive income, you keep some part of it aside, for saving and investing.
We need a savings plan because it is an important wealth-building tool.
It allows you to keep aside what you have planned. It removes guesswork from the process of saving.
Some benefits and importance of saving
1) Financial Independence;
We achieve financial freedom faster when we save. We are able to plan and avoid living paycheck to paycheck. Savings free us to explore financial growth avenues, unlike when we are constrained with resources.
2) Availability of funds in case of emergency;
In life, we face many uncertainties that happen suddenly and without notice. It is prudent to self-insure ourselves to the best of our abilities.
Just the thought that your a rainy-day stash set aside can give you some peace of mind to face everyday challenges
3) Compound interest;
Albert Einstein describes compound interest as the 8th wonder of the world. When we start saving early in life, we benefit from higher interest because of the long saving period.
This is especially true for retirement savings. As an example, for a 25-year-old targeting to save Kshs.1 Million by the time he is 65 years, he will need to only save Kshs. 179, assuming an interest rate of 10% annually.
On the other hand, a 45-year-old will require to save at least Kshs.1,382 at the same rate. The difference in years between the two is only 20 years yet, the difference in the amount saved is more than 650%. It literally pays to start early.
4) Creates the culture of delayed gratification and reduces consumer debt;
It takes quite the discipline to form a habit of saving.
We have to forgo something now for a better tomorrow. In forming this habit, we become slow in purchasing items especially those that will get us in debt. We are more measured in our purchases.
5) It helps build a foundation for investing;
Some investments require a large outlay of funds. Examples of such investments are the purchase of land, a home, or even start-up capital for a business.
When we start saving even if it’s small amounts, given time it grows into a large amount, and we have the big deposit when we need it!
6) It allows for enjoying life’s pleasures;
When we save with intention, we can travel and holiday whenever and wherever we want. It helps us to build life long memories with our loved ones and accomplish our lifestyle goals.
7) We become more aware of our financial affairs;
It is difficult to save if you do not know how much you earn and how much you spend.
You have to be aware through budgeting and financial planning of what you can afford to save. And so you are more in control of your financial life.
Who should save?
If you earn any form of income then you should save. Saving is not a function of how much you earn.
I have been saving for a while now, however, until I read ‘The Richest Man in Babylon’ by George S. Clason, I was convinced that I couldn’t save. In fact, I believed that saving was for other people, mostly the rich.
The setting of the book is ancient Babylon. One of the characters in the first chapter of the book, Bansir, wonders how one of his friends has managed to acquire so much wealth, yet he had to work daily just to put food on his table.
I resonated with Bansir. Putting aside some of my income for a ‘rainy day’ had always been a far-fetched idea. I was barely making ends meet, so what would be left for me to save?
Yet once I formed the habit of saving I wondered why it took me so long to do it.
The Finance Access Household Survey report April 2019 (Finaccess report) which was done in collaboration with the Central Bank of Kenya, the Kenya National Bureau of Statistics and Financial Sector Deepening Kenya, had some interesting statistics.
It revealed that 38.3% of Kenyans do not save because they don’t have enough money to save, while 42.3 % say they require a regular income to save.
These two reasons, coincidentally, are the main reasons why we should be saving aggressively. We all need to save, primarily because there is no guarantee on what will happen tomorrow.
How should you save?
As much as possible, automate the process. Saving should not be determined by your mood or your flavor the month!
One of the most powerful pillars in saving is, save first, before spending.
But if we depend on our will power chances are that our failure rate will be quite high.
Always save before you spend otherwise there will be nothing remaining to save since expenses will always increase to meet what is in your account.
Do what your accountant does with your Pay As You Earn (PAYE) taxes every month he never lets you see that money. Similarly, Supermarkets never consult you on whether you want to pay the Value Added Tax, they simply deduct it automatically with every purchase you make!
Try to let the process run with little to no intervention from you.
This could be through:
i) Check -off to your Bank / Sacco or Money Market Fund;
Ask your accountant to deduct the amount as the payroll is processed before it lands in your bank account.
iI) Direct debit/ Standing order;
Here, the amounts are taken from your Salary account and channeled to your savings account or money market fund as soon as your income hits the salary account, monthly.
Other avenues that give the motivation to save:
iII) Investment groups / Chamas;
I have seen great discipline in saving in the Merry-go-round system. The group members contribute a certain amount of money that is given to one group member every month.
Eventually, you get as much as you have contributed to others. This is a good way to save because of accountability to each other.
Chances of a member slackening are reduced.
iV) Participating in Challenges:
a) 52 Week savings challenge:
At the beginning of the year, several groups run the 52week savings challenge. Every week, a member is required to have saved a certain amount up to the end of the year.
This is an appealing way to save especially if you are competitive by nature.
b) Saving specific currency amounts:
I know some friends who decide that besides their monthly savings, they save, say every Kshs. 500 bob or Kshs. 200bob they come across. I must say I have tried it and the amount does add up.
c) “No Spend” Week or Month:
As the heading suggests, the challenge requirement is, spending should be reduced or eliminated where possible. So, the participants pay their essential bills, after which they do not spend any more money. This challenge requires a lot of discipline, but it helps create the habit of spending minimally.
Where should you save?
You should always save your money where it will be safe, but it would be inconvenient for you to frequently access it.
Your money should also earn an interest higher than the prevailing inflation rate.
As earlier mentioned, there are several places where you can save money.
This includes;
1) Savings Account;
It is not my personal favorite because of the low-interest rates associated, but it can be a good starting point.
2) Fixed Deposit Account;
I like fixed deposits because of how inconvenient they are. Especially when you try to access your money before the agreed period lapses. The interest rate can also be reasonable if negotiated in advance.
3) Treasury Bills;
These are government securities that are offered at an interest rate to the buyers. Treasury Bills have a tenor of up to 1 year.
I like T-bills because they have a good interest and are relatively risk-free since you are lending the government.
4) Money Market Fund;
These funds are especially great good because of the interest rates they offer. It is usually higher than the Treasury bills rates. It has quite a process for withdrawal, so the funds are not too easily accessible.
5) Savings and Credit Cooperatives;
Deposit-taking SACCOs are good saving avenues because they allow a member to save and at the same time borrow against the savings.
The deposits also earn an annual interest.
As human beings, delaying gratification is uncomfortable, It is just how we are wired. We do not like to postpone pleasure; our thought process is offended by our self-denial of pleasure!
Saving is a difficult discipline to cultivate. Having money set aside but knowing you cannot consume it presently, no matter how cool the handbag, shoes, or new clothes will look on you, is not easy.
For many of us, the temptation to go back into the savings and use the money is quite high. In fact, it is amazing the number of “emergency” situations that come up because money is easily accessible.
I have encountered many people who start saving part of their income with all good intentions. However, they just can’t sustain the habit because the money was easily accessible to them.
So as much as possible prioritize saving in “inconvenient” but safe places.
What should you save?
Personal Finance experts recommend that you save a specific percentage of your earnings, and at the very least 10%.
I agree with this approach because it is so much easier to implement and it means that your savings increase as your income increases.
The likelihood of stagnating is reduced, as the amount saved is not constant.
Why should you save?
Rather than use negative motivation, get positive reasons for saving.
To build an emergency fund, or to help you build up a healthy deposit to buy a home, or to buy a car, to go on holiday, or to boost your retirement nest egg among others.
It is vital to have a good WHY. This will keep you going when you want to give in and blow-off all your money on a whim.
Fear of the future may look like a good reason, but it will not get you to the end of the savings marathon and believe me, saving is a marathon requiring a slow and steady pace, not a sprint.
The positive reasons will sustain you for the long haul when you feel fatigued.
So, when should you start saving?
Yesterday, but the next best day is today. Start small, start where you are with the little or much you have, but start today!
Your future self will certainly thank you for putting in the effort.
I can’t wait to hear how your savings journey is going.
Looking forward to the next article.
Most Welcome DN!