I often encourage people to have savings – whether it’s for rainy days or just for the sake of it. You will recall firstly that COVID-19 exposed just how financially unprepared many of us were. With the nationwide lockdowns imposed in 2020, many of us were unable to work and earn an income, forcing us to rely on our savings (if we even had any). In this blogpost, I discuss reasons why you must save.
What is the difference between saving and investing?
Personally, I like to think about saving from this perspective. Imagine you are a first-year university student, committing to a four-year degree. You spend many late nights studying hard, doing assignments and writing countless exams so you can finish your degree and graduate.
Once you’ve graduated, the degree provides you the opportunity to earn a lot of income (whether from employment or entrepreneurship) in abundance. Granted, unemployment remains a big challenge, however, with a degree you have a number of skills that can help generate you income.
Continuing with this analogy, saving money is similar to the university commitment. By saving money, you are committing money, usually on a short-term basis so you can achieve a specific goal e.g. get a degree and graduate. Investing on the other hand is a longer term, where like your university degree, your money works for you by earning you income.
Why should you have saving goals?
Having savings goals helps you stay focused and disciplined. Personal finance coaches usually speak about goals that are SMART – specific, measure, attainable, realistic and time bound. For example, I want to visit New York City in October 2022, which will cost me XXX.
Other goals can be saving for your tuition fees, deposit for a new car, rainy days or like Morgan Housel writes in his book Psychology of Money (2020) ‘you should save for the sake of saving’. Having goals that are SMART helps you better articulate your goals and helps you stay the course.
With the savings goal well-articulated, the next step is to start thinking about where to save the money.
Where to save?
There are many ways for you to save.
- Traditional savings accounts with local banks – You can open traditional bank accounts to start saving. This also includes notice accounts such as a 7-day, 32-day or 88-day notice account.
- Treasury bills – you can save money via Treasury bills offered by the Central Bank of Lesotho. Treasury bills are short term savings instruments i.e. 91 days, 181 days, 272 or 364 days.
- Unit trusts with local asset management companies. Unit trust funds such as Money Market fund is another way you can start saving money by buying units in a collective investment scheme from a registered asset manager.
- Mobile wallets from mobile network operators of fintech companies. You can save money via mobile wallets. This is especially relevant for savings clubs or mekhatlo. Personally, I love mekhatlo or savings clubs because they help bring people together with the same savings goal and keep them accountable to the goal.
How can technology help?
Because having the disciple to save and be consistent can be challenging, it is wise to leverage, use technology, automate savings and take the burden away from yourself. You can set up a debit order facility, where the money is collected from the transactional account and transferred to the savings account.
A debit order can be setup with a third party such as an asset manager or via your internet banking platform as a scheduled payment. It is important however to provide for the debit order. Say for example, you’ve automated the collection for the 25th day of every month, you must ensure that there is money in the transactional account.
What to consider when saving money?
The first one is what is called inflation.
Inflation is the general increase in prices of goods and services. In Lesotho, inflation is currently at 9.8% (Central Bank of Lesotho, 2022). A high inflation means that the value of your money deteriorates.
Secondly, the second consideration is the interest rate you are earning on your savings. The goal is to earn the highest interest rate as possible. When saving money with the banks or asset managers, it is important to determine how much interest you are earning and then compare it with the rate of inflation.
Thirdly, determine if there are any other associated costs or applicable taxes such as withholding tax.
Do I need a lot of money to start saving?
Many people usually think that they must have a lot of money to start saving and unfortunately never start. Well, I am of the view that you don’t need to have a lot of money to start saving. You can start with as little as 50 bucks or 100 bucks – what is important is to start, develop the discipline and be consistent with saving.
It is important to develop the habit of putting money aside for yourself. How do you pay yourself first?
The principle is to put money aside – in your savings and investment accounts before you pay anything else or anyone else. Warren Buffet encouraged us to “spend what is left after saving”, which can start by taking at least 15% of your income and saving it for a rainy day or towards your goals.
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