SAVING VERSUS INVESTING

 Saving Versus Investment: How Similar or Different Are They?

Although the habit of saving is crucial in mastering your money and attaining financial freedom, many people either take it for granted or don't know how to save (if the messages from employees and owners of SMEs unable to save I've been receiving are anything to go by).

With the proliferation of digital money lending apps, it has become easier to borrow money than to save. The lack of a saving plan and inability to save cash are common personal financial problems. The statistics about Kenya's poor saving culture and habit of borrowing for consumption point to a bigger financial problem.

In July, 2021, financial analysis by EFG Hermes showed that Kenyans are among the poorest savers in East Africa at a rate of 12% below the continent's average of 17%. Many people retire without a robust safety nest or reliable passive income from income generating assets. 

Causes of poor saving culture

1. Consumer driven culture. This culture was inherited from our forefathers right from the ancient times of hunting and gathering. This traditional culture is anchored on the belief of living today and eating everything available for tomorrow will take care of itself.

2. Investing in children as a retirement strategy. Many parents have a retrogressive belief that once they have borrowed and invested heavily for their children's education, they children will definitely take care of them during their old age. Nothing can be further from the truth. Parents should be responsible enough and invest wisely in profitable investments with good returns because children will also have their own cares and burdens to think of.

3. The harambee culture. Besides the consumer mindset, the harambee mentality has permeated the society and made people dependent on others for survival. Fund-drives are organized at any slightest need like medical expenses, school fess, weddings, graduation ceremony, funeral expenses, political campaigns et cetera. in as much as harambees are good, but this habit has made many people lazy and not mind of saving for emergency, school fees, taking life cover etc.

4. Unfavourable fiscal and monetary policy. in the wake of the Covid-19 pandemic, the economic enevironment has hampered business growth and reduced viable opportunities for investment. MSMEs have collapsed, massive job losses, reduced pay and drastic decline of income generation have made saving and investment more difficult. The stimulus package introduced by President Uhuru Kenyatta gave short term relief. The resumption of tax levies and increased taxation on savings (withholding tax) have not been helpful.

5. Lack of personal financial education. This the major cause of a poor savings culture. Many people including the highly educated employees do not practise basic financial skills like budgeting, saving, tracking expenditure, debt management and having diversified investment portfolio.

Meaning of saving

Saving refers to the practice of putting aside a certain percentage of your total income for a certain activity or event. You can save for emergency, investment, school fees, funding irregular expenses or retirement. It is undoubtedly a bottom-up economic strategy of increasing your deposits for purposes of investment and wealth creation.

Differences between saving and investing

1. Saving is not necessarily the same as investing. Saving means putting money aside for a purpose while investment/investing means the process of making your money work for you, that is, multiplying your money or receiving a higher return.

2. Saving has lower returns than investing. When you put aside money in a bank account, you're just saving it as the interest rates are relatively low compared to the inflation rate of let's say 6.5%. Though in both, money grows, saving has lower returns on deposits while investing accrues higher returns on the investment (especially in avenues like government securities, stocks, private equity, unit trusts etc.).

3. Saving has a lower risk than investing. Hence, the higher the risk, the more the returns on the invested money. That is why savings are deposited in secure place or avenues like banks, Money Market Funds, government securities and even well-managed Chamas or Saccos whose interest rates may not be so high as long as the money is safe. Some of the of the vehicles are considered both as savings and investments avenues. You can channel a specific amount of money per week or month to money to buy stocks or unit trusts like MMF. Some unit trusts are purely saving vehicles because they earn your lower interest rates below inflation like banks, MMFs of some fund providers like Old Mutual.

4. You don't need lots of money to save or invest. When saving you need to consider inflation i.e. the value or percentage of depreciation in the purchasing power of a certain currency. For instance the value of Kshs.1,000 reduces to Kshs.932 of the inflation rate is 6.8% per month.

5. Unlike savings, you should have a rich and diversified investment portfolio. It is advisable that when investing you should choose a variety of investments as opposed to putting all your eggs in one basket e.g. real estate, stocks, securities, unit trusts etc.

6. Investing is usually more goal-oriented than saving. This determines the tenure of investment and the risk you can take. However, saving should equally be goal-oriented for it to be meaningful and have a sense of focus; for instance saving for emergency, school fees, retirement and investment.

7. Savings are usually short-term but investments are usually vary long-term. Savings can lead to investing. Long-term investments include stocks, Saccos deposits, real estate, treasury bonds. pension and retirement scheme whose returns guarantee passive income and capital growth.

Note. 

When saving and investing, you ought to consider your financial goals, sources of income/saving ability, needs, rate of inflation and risk involved. Beware that not all investment options are worth investing. It is unwise to invest schools fees or emergency funds in stocks or private equity that promise an attractive return of 15%. Always assess and review your goals, needs and demands from time to time.

Importance of saving

1. Mastering your money i.e. becoming financially disciplined and taking control of your money.

2. Helps you achieve your financial goals. Makes investing easier as you've starting capital.

3. Cushions you against any disaster/emergency. Reduces financial stress.

4.  Helps you plan your future i.e. leave a good legacy to your family/ dependents. 

5. Boosts your self-confidence and self-esteem once goals are achieved.

Note. "Don't save what is left after SPENDING, but spend what is left after SAVING." Warren Buffet

Best saving methods for employees and SMEs

1. Opening a bank saving account or Mobile apps like M-shwari for channelling specific amounts of money every day, week or month with a certain target in mind. You can do it manually or automate your savings via direct debit, standing order or check off.  This comes with a fair share of challenges ranging from low interest rates and easy withdrawals when something emerges. You should exercise utmost financial self-discipline by not withdrawing the money any how.

2. Using a certain percentage like 80/20 or 50/30/20 Rule  for budgeting with saving as the first expense. Paying yourself first is the motto. You can start with the bare minimum of 10% then increase to 20% and 30%. You can spend 10% for tithe, 20% saving, 10% donations/helping others and 60% for all other expenses. Always endeavour to live below your means and strive to increase your streams of income.

3. Chachanomics Savings' Challenge. This method requires you to set a target of saving Kshs. 10, Kshs.20, Kshs.50,Kshs.100, Kshs.200, Kshs.500 and Kshs.1,000 per day, week or month so that you can save Kshs.3,650, Kshs.7,300, Kshs.18,250, Kshs.36,500, Kshs.73,000, Kshs.182,500 and Kshs.365,000 respectively.

Other saving strategies

1. Setting a saving goal e.g. Ksh.60,000 by the end of 2021 in order to buy a cow, start reading chicken,  pay school fees etc. This will be broken down into s monthly target of Ksh.5,000.

2. Cutting down unnecessary expenses by budgeting and monitoring your expenses daily, weekly and monthly.

3. Shopping in bulk instead of small portions. 

4. Proper food preservation and utilisation. 

5. Looking for offers and discounts. Getting more value for less.

6. Paying off debts asap - avoid debt trap, consolidate & negotiate for affordable debt payment schedule.

7. Putting coins or loose change in a sealed jar/small container.

8. Using a budget as a guide to achieve our financial goals.

9. spending one day in week without spending on anything

10. Avoiding impulse buying, eating out less and carrying packed lunch .

Parting Shot

1. It is possible to save during these tough times of Covid-19 despite the socioeconomic challenges because saving is more of a habit than a mere happenstance.

2. Let's avoid getting into the trap of debt. Don't borrow to consume but to invest in income-generating projects. Passive income.

3. Remember to have money talks with your family, learn how money works and how to increase your income so as to save more.

4. Do not eat your children's children, reinvest your dividends, profits or extra/passive income through the power of compound interest. If you cannot make it you cannot keep it. Consistency and discipline over time are key.

5. Have a clear WHY (e.g. secure and wealthy future), get financial knowledge (get a coach), work hard and smart (earn, save and invest), have a financial plan and follow it consistently and live within your means.

N.B. Money speaks one language, "Save me today, I will save you tomorrow."

John Maxwell once said, "The secret to your success is in your daily habits." You do not choose your future, you choose your habits; and your habits choose your future.

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