‘Saving’, as a consistent and regular practice, is a fundamental part of wealth creation so much so that if you are not able to save then it may be more difficult to achieve your financial goals. We all have varied goals when it comes to our finances – my primary personal financial goal is to achieve ‘financial freedom’ which for me means being able to spend what I like when I like.
In order to achieve this, I have committed to building wealth through saving and investing, denying myself today in order to reap the benefits tomorrow. In spite of this commitment I must confess that my secret desire is to achieve what I consider the ‘Nigerian dream’ and hammer BIG (Yes Lord!) but as that option is largely outside of my control I choose to focus on consistently implementing habits that will pay off with time.
This post is part 1 of a 3-part series that will introduce you to saving money by giving you the what, why and how of this critically important personal financial habit.
1. Savings: “money put by” (MWD n.3.a);2. Saving: “preservation from danger or destruction” (MWD, n.1) The first definition is short and to the point – “money put by…” and it follows that there is a specific reason or purpose behind the putting by of the money – more on that later. The second definition does not refer to money explicitly but introduces a really important fact about saving which is that by not saving, there is the possibility of destruction of your money! What am I talking about? Here are some ways in which money can be destroyed:
Consumption. We live in a consumer society and world and barely a day goes by without us having to buy goods to fulfil various desires whether they be wants or needs, material or essential. We can easily destroy our money through consumption – usage of that money for an alternative purpose which, let’s face it, may not necessarily be productive or necessary. We are hard wired to spend and in a country like Nigeria it can be very difficult to say ‘no’ to buying another set of aso-ebi, or upgrading an already decent phone, to buying your 10th weave or wig or to helping out a friend in need. There are multiple reasons to spend all with varying degrees of necessity. To overcome this tendency, tough choices have to be made and commitment to focussing on needs rather than wants. – Ignorance of the time value of money. There is a financial concept known as the ‘time value of money’ which basically states that money, e.g. ₦1,000 in your pocket, today is worth more than ₦1,000 in your pocket at some point in the future. This is because you can use the ₦1,000 today in a way that earns a return and increases its value relative to the money received in the future. Taking action today to save creates more value than waiting to take action later. – Inflation. Inflation is the rate at which prices rise over time. It is an important concept to understand because it affects the value and the purchasing power of your money. There are many examples of price rises from seasonal diesel and food price increases to the price of foreign currency and beyond. The devaluation of 2016 had a double impact as not only was foreign currency more expensive, a number of imported goods e.g. cars immediately became more expensive in Naira terms as a result. We must all be aware that we can erode the value of our money by not saving at all or by saving in a way that does not preserve and increase the value of the money or earn a return.
The why
To save or not to save?
Hopefully by now you will realise that this is a trick question. If not, let me repeat, we all need to save even those of us that have a ridiculously large source of wealth / trust fund / have hammered etc. Saving is one of the foundations of wealth building, so we all need to find or create opportunities to save. The ‘why’ of saving can be summarised by the time-tested proverb ‘Fail to prepare, prepare to fail’. Unknown
The genius of this quote is in its simplicity and summary of action and consequence. Preparation can be tough but it more often than not pays off with the achievement of your desired outcome. Setting ourselves financial or other goals without a plan takes us into the realm of wishful thinking. Hope is not a strategy! We all need to have concrete plans to give ourselves a better shot of success. When it comes to saving, you will need to plan the following:
– How much you are going to save- Where you are going to save- What you will do when life competes with your savings plan Some ideas on the How, where and what will be shared in part 2 of the series. Thanks for listening and here’s to meeting your financial goals!