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Savings Simplified: A beginner’s guide to savings and investments
By Eugene Alexander | Updated May 11, 2020 at 12:03 EAT
savings-simplified-a-beginner-s-guide-to-savings-and-investments
A beginner’s guide to savings and investments (Pho
SUMMARY

 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. 

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:

  1. 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)
  2. 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.
  3. 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 Africa

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.

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