“ Compound Interest Is The 8th Wonder Of The World. He Who Understands It, Earns It; He Who Doesn’t, Pays It” - Albert Einstein
For sure, nobody knows tomorrow.
All the terrible things can happen – incapacitation, loss of
job, or even a business going up in flames (God forbid!).
Yet, life must go on. Your expenses will still be waiting
for you, your family needs to be fed, the school headmaster is waiting for his
fees, and more.
And that’s where your savings come in.
Yet, people don’t seem to know how to save money in Kenya.
Some will not save claiming they will start saving once they
earn a bumper pay rise or get big profits from their business.
Others will say they are waiting for the dream job to start
saving. A good percentage will say the cost of living is high…plenty of
reasons.
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 the 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 you have 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 willpower 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.
13 Smart Saving Tips
1. Take Care of Your Precious Items
Some good amounts are spent to replace useful items that you
may have given out or left to run down.
For instance, some young mums dispose of the baby
stroller too soon only to wish they had stored it safely on getting the second
born.
Cars, computers, boda bodas, and other home assets would be
cheaper to replace if properly maintained as they would have a salvage value.
Better still, some of the assets could be income generators. For example, you can rent out your car or boda boda for a fee if it’s in good condition.
2. Maintain Accurate Spending
Records
Sometimes, you will receive some money only to realize that
its gone after a couple of days yet you can’t explain where the cash went.
Keeping an eye on personal spending comes in handy to avoid
such happenings and is a great way of controlling expenditure.
Record every payment in a notebook. Later, from your
records, you can analyze your expenses keenly and decide the items to
eliminate.
And nowadays, the availability of mobile budgeting apps make it even much easier. So, why not download and install a good budgeting app like Dollarbird?
3. Sharing cars
What about sharing the car with your neighbors?
You save fuel cost, parking fees, and wear and tear. All
these will go into your savings basket.
Ride-sharing apps like uber are also worth a try- if you
must use private transport since they are cheaper.
And by the way, public transport is still there. After all, we are saving with a goal so the sacrifice is well worth.
4. Cook Your Own Meals
Dining out occasionally gives you a break from the boring
kitchen routine. But we all know that cooking dinner at home is by far cheaper.
In this country, some eat out even five times a week despite
that hotel meals in quality restaurants are hugely overpriced.
Home-made meals save your hard earned cash and boost one’s
health since they are more complete than hotel snacks.
Carrying your home-made delicacies to work will also help you save.
5. Delay big purchases until the
most effective time
That new TV, expensive laptop, or car can be bought next
month. Or the month thereafter.
The idea here is to be smart and wait. And patience pays-
sometimes the seller will even put the item on a promotional price so you may
buy it at half-price.
That’s not all. At some point, when waiting, you may even realize that you really didn’t need the laptop! Imagine the savings!
6. Reduce those coffee dates
Spending time at Java or artcaffe looks awesome- that
is until you calculate how much you spend each time you visit the place with
pals.
While not easy, you can make handsome savings by staying
away from Java for as long as possible.
At the very least, avoiding the daily coffee dates.
7. Rein in on Impulse Buying
Studies have shown a big number of Kenyans are fond of
making frequent heat-of-the-moment purchases.
At the same time, cunning marketers keep pushing Ads on your
face including online so the temptation is real.
Similarly, shopping malls are strategically placed with a
reason. They want to get a piece of your pie before everybody else.
Here is an idea:
Budgeting will save you from drowning in money problems because of splurging on impromptu luxuries.
8. Avoid Mobile Loan Apps
Kenya has over 20 mobile loan apps and its very easy to
access small personal loans from the convenience of your phone.
And we cannot deny it- mobile loan apps are a big
temptation.
But this also means it’s very easy to sink deeper and deeper
into the wilderness of debt as you keep borrowing from one app to pay off the
other.
Not forgetting that CRB will be lurking.
Here is an idea:
Why don’t you just uninstall the mobile loan apps and live free of debt? Those little interests can be big if cumulated into your savings pot.
9. Invest in a Water Bottle
Water is life and you are to take at least 2 litres,
according to health professionals. However, a significant percentage of Kenyans
survive on bottled water for some reason.
First, but for a few exceptional brands, it’s not that
different from typical tap water- forget about that hogwash about the water
being purified through reverse osmosis!
Secondly, the prices are a bit exaggerated.
For example, in Jumia, 1.5 litres of Dasani costs about
shs.80 so if you are to take the 2 litres, it will be more than shs.3000 per
month.
Buying a quality water bottle at shs. 500 will, instead of this expenses, enable you to carry boiled water from home and brings some further savings.
10. Be Mean!
Being charitable is awesome. Be philanthropic in church,
attend Harambees, and help street children. But not at your own expense.
While giving is a very noble gesture and very
fulfilling, frequent giving may leave a huge dent in your pockets.
Here is an idea:
Why not set aside a donations budget. Then donate wisely. Then, once you exhaust the set amount, you simply start acting mean.
11. Consolidate Your loans
Juggling multiple loans is naturally a headache. Then you
will be facing suffocating interest rates.
Clever Kenyans are turning to their bankers and talk them
into buying off their loans held in other institutions saving big on interest
costs.
Under such a plan, you combine all existing loans and other
debts such as from credit cards into one main loan, usually at reduced interest
rates (Make sure you negotiate).
The good thing is that many mainstream banks are ready to purchase loans held elsewhere provided your credit history is fine.
12. Authorize a Standing Order
While everything is said and done, serious savers channel a
certain portion of their salaries/business income into the bank savings
account.
Now, to ensure you will never miss a step, you write to the
bank and initialize a standing order.
With that, the bank will be automatically deducting and
remitting the specified amount as soon as some money lands in your main
account.
This way, you’ll not have any more excuses not to save.
13. Workout at Home
You can still stay in tip-top shape without subscribing for
an expensive gym membership.
Some exercises like running don’t need expensive equipment
to start while numerous free online tutorials are a perfect substitute for an
expensive trainer.
In the long run, you can buy the required machine and build
a small gym right at home.
At the worst, start with jogging while sending the money you
salvage here to your savings account.
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.