Last week we discussed the importance of budgeting and planning in our journey to financial freedom. We learnt that allocating money to savings in our spending budgets is the first step in ensuring that we save consistently; that savings themselves are not our goal because the return is low; instead savings are the channel through which we aggregate funds for investment in higher yielding assets. Savings are also helpful when we face emergencies.
An investment asset is a property that generates income for its owner. Therefore, our cars are not investments except we also use them as taxis. Our homes are not investments except we rent out some rooms in the building. Otherwise, they are simply personal use assets.
For salary earners, taxes are deducted for government from salary before you receive it. Similarly, we’re encouraged to give to God from the first-fruits of our increase. After God and government have got theirs, shouldn’t you, the labourer, be the next to take something out of the money? Before the telecoms company, supermarket or hairdresser. No amount is too small to save. N1, 000 monthly for one year gives you N12, 000 in December that you otherwise would not have. But strive to save a minimum of 10% of every inflow. If you cannot do 10% immediately start with what you can and increase gradually. Meanwhile look out for ways to reduce your expenses and increase your savings ratio e.g. packing lunch from home; entertaining guests at home; using energy saving bulbs; using the cheapest telecoms package; carpooling for school pickups and so on. This underscores the importance of recruiting every household member into this financial intelligence mindset.
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Pay yourself first – save first and spend the balance: Stop spending first and saving only if anything is left.
The best way to save from every Income is to set up a standing order with your bank – once your salary is paid the savings should be deducted and moved to your savingsaccount. For obvious reasons, we should not have ATM cards or mobile banking services for savings accounts. You could also instruct your bank to transfer a fixed sum monthly to your Stockbroker – whom you would have instructed beforehand on how to allocate the funds.
The Federal Government in its bid to borrow cheaply and simultaneously stimulate the savings culture in Nigerians introduced the FGN Monthly Savings Bond. Minimum Investment is Five Thousand Naira. Interest (paid Quarterly)is 10% p.a. compared to 3% with Commercial Banks. Though the tenure is 2-3 years, your stockbroker can arrange to help you redeem/liquidate it, should you need money urgently.
Generally money market instruments are the best way of aggregating our savings. Money market like the appellation suggests deals only in financial instruments. There are no underlying assets like company shares (which we get from the stock market). These instruments are usually short tenured and highly liquid (easily converted to cash). Examples are Bonds (e.g. FGN Savings Bond), fixed deposits, commercial papers, treasury bills etc.
FGN Treasury Bills – another form of borrowing by Government; have tenors from 90 days and above – but they can be liquidated before maturity. The minimum amount is One Hundred Thousand Naira. Interest is higher than for Savings Bonds and is paid upfront. Ask your Banker about this.
The ajo/esusu savings method is highly effective if we have a good hold on every group member. However since we are on the Journey to Financial Freedom, we should strive to ensure that the Collection is used for Investment Assets and not just personal use items.
For salary earners, our retirement savings are deducted (same time as our Taxes) and remitted to directly to our Retirement Savings Account (RSA). Do we know we can also operate a Voluntary Savings Account (VSA) with our Pension Fund Administrator (PFA)? The PFA would also invest and grow this Additional Money on our behalf with the same Professionalism they do our RSA. The benefit of the VSA is that we control its disbursement 100%. We can institute a standing order with our bank to transfer money directly into the VSA.
Through these savings strategies we effectively aggregate money for meeting life’s events, invest for financial freedom and create shock absorbers for financial emergencies. So allocate an amount to savings in your personal budget and start saving immediately.
and then