How did you learn about saving? Many of us have read of
people who have accomplished milestones both in their lives and careers. We
always wonder how they did it. It's interesting to note that most of the
successful people we know are disciplined in wealth accumulation. With the
availability of information nowadays, most people learn about savings from
their colleagues at work, company-sponsored events, engagements with financial
advisors, family members, friends, and the internet, just to mention a few. Well,
it is essential to emphasize having the right knowledge and information is
essential in the savings journey.
It is critical to think about the future because you can
never tell about how things will be over a given period of time. Additionally,
planning ahead makes it easy to accomplish our goals without getting into bad
debts and ruining our reputation. There could be a medical emergency, loss of
items through burglary, increased commodity prices (inflation), and loss of a
job. Having some funds set aside can be of immense importance in those rainy
days.
Like with every goal, it is the action and effort that we
put into it that eventually matters. The first step we take is crucial as it
will make us develop good habits that are critical in attaining what we aspire
to do or become. Savings and investments should be tied to a goal. One should
always start by identifying what they are saving for. What do you plan to
achieve in a month, a quarter, a year, five years, or even a decade? It could
be purchasing an asset or equipment, saving for education, a car, business,
home, and comfortable retirement. The particular goal that you have will be
critical in helping you identify the most suitable saving instrument.
There are various avenues of savings and investments which I
will highlight below:
- Savings
Accounts (Bank Accounts): These are the most common ways that most people
use to save their money. However, it is critical to differentiate between
current/transactional accounts and savings accounts. While the former is
used for normal day to day transactions, the latter is mainly used to
accumulate funds over a given period of time without necessarily accessing
them frequently, as is the case with current accounts. It is also critical
to note that banks and other financial institutions have certain
requirements regarding the accumulation of interest on funds that are
saved. For instance, some institutions limit the number of times you can
withdraw from your savings accounts to earn annual interest. It is also important
to mention that in the case of most savings accounts, interest is earned
at the end of the year. Let's take an example of Liz, who saves Kes. 5,000
monthly for 12 months. By the end of 12 months, she would have accumulated
a total of Kes. 60,000 in savings. Supposing she did not make any
withdrawals, and the bank gives an interest of 5% per annum (average
deposit interest rate in Kenya). To identify the total amount in her
account at the end of the year, we use the Simple Interest formula to
determine interest accrued. (SI=Principal*Time*Rate/100). Therefore, she
would have accumulated a total of Kes. 63, 000 (she gained an interest of
Kes. 3,000 in 12 months)
- Call
Deposit and Term Deposit (Fixed Deposit): This type of saving is mostly
relevant to individuals with large sums of money, which they can set aside
and save in a bank/financial institution at an agreed rate. Most of the
people and institutions who would fit into that category are professionals
who have been in the industry for several years, directors of
institutions, business owners, expatriates working in non-governmental
institutions as well as fund managers. In most cases, the bank would agree
to a specific interest rate that is favourable to the person and/or
institution that is interested in fixing some amount of money over a given
period of time. The rate is usually above the normal rate that is provided
for other savings products.
- Money
Market Funds: A money market fund is a type of mutual fund that invests in
high quality, short term debt instruments, cash, and cash equivalents.
They are considered an extremely low risk on the investment spectrum. This
is because of the preservation of capital invested. It implies that an
investor is guaranteed some earnings, and their capital will not be
affected by irrespective of changes in the economy or market conditions.
The good thing with money market funds is that just like savings, you can
access your funds at any moment of need. However, it is worth noting that
the number of withdrawals is also limited. At specific points, you may end
up forfeiting interest accrued over a given period in the case of
premature withdrawals. Almost all the big insurance companies in Kenya
have money market funds products. These include Britam, Sanlam, CIC Group,
Madison Insurance, and ICEA Lion. Money market funds are different from
savings accounts in the sense that interest earned is usually as a result
of the compounding of the monthly principal.
4. Retirement/Pension Schemes: These are saving instruments
that allow an individual to accumulate funds that will be used upon retirement.
Many corporate institutions usually provide a contributory scheme where both
the employer and employee contribute a certain amount towards the scheme. In
some cases, it is possible to access a portion of the pension contribution upon
premature termination of a job or in the case of redundancy. However, some
schemes restrict access until an employee has reached the retirement age limit.
The pension sector is evolving, and many scheme managers have introduced
products tailored to the self-employed as well as providing avenues for ease of
contribution through the use of mobile apps and USSD Codes. They include firms
like Zamara Kenya (formerly Alexander Forbes), Stanlib, Zimele, and Octagon
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5. Life Insurance: Various insurance products are relevant
to an individual's goals, wealth level, and risk appetite. Some of the most
common life insurance products are geared towards saving for children's
education, short term goals, long term investment goals, as well as last
expense benefits. Life insurance is especially geared towards giving someone
peace of mind of having their beneficiaries catered for in the event of
incapacitation(total disability) and death. It also provides an avenue of diversifying
wealth creation avenues since some policy terms can go up to 10–20 years.
6. Saccos: These are membership associations that provide
avenues for members to save besides allowing them to access credit facilities.
Members usually also earn dividends yearly from their contributions whenever
dividends are declared. Professionals in a given sector mostly use them. For
instance, Mwalimu National Saccos is generally geared for teachers, while Kenya
Bankers Sacco is mainly for individuals in the financial services industry.
In conclusion, it is critical to note that while some people
are disciplined in saving on their own, group behaviour such as the use of
Chamas to mobilize funds for investments is a great avenue to inspire
continuous savings and having accountability partners. It is also essential to
automate savings so that you don't run the risk of failing to do so in
particular periods. Some of the automation tools include the use of standing
orders so that funds are channeled to a specific account at a given date of the
month when you receive your income. One should also choose a saving platform
that makes it easy to make contributions but quite challenging to access the
funds so that you don't end up withdrawing from the savings kitty. For instance,
saving on M-PESA wallets makes it easy for someone to use the funds to cater
for short term and immediate needs instead of the purpose for which the funds
were initially meant for.