Saving is something we have all been told to do since we were little kids. Trouble is saving doesn’t exactly seem to help to make people wealthy. That is to say, you will see saving being touted by both the wealthy and the not so wealthy. So it clearly isn’t the defining factor in wealth. What makes a difference is what you do with the money after you save it. That’s what we’re going to explore today, what do with the money you save. These are practical tips for everyday lives and should be easy to apply. These tips are equally applicable to those who already have savings in place and those who want to start saving. While they are listed in order of importance you really should be doing all that apply to you.
Emergency fund
While emergencies are usually a result of unforeseeable circumstances if and when they do come around, they walloped us. The emergency fund is meant to help you if disaster strikes and you need to access money quickly. So this needs to be placed somewhere you can access it immediately. The bank might work but history tells us this isn’t always safe. To say how much needs to be in an emergency fund is difficult. Anywhere from US$100 to US$1500 or more. The idea is to have short term cover of some sort. For those who are worried about the amount consider this, if you put US$10 per month into your emergency fund it gradually builds up. It would be great to have all $1500 ready right now but the reality is that is difficult.
Savings
An emergency fund is for times you are absolutely blindsided by a short term immediate need. Sometimes the problems we encounter endure a bit longer. A good example of this is a bout of unemployment or loss of income. 2020, Covid-19 and lockdown are all we need to look at to understand how dire this can be. Saved money does not automatically equal savings. You could also call these income protection savings. The numbers involved here will differ from source to source but the concept is quite simple, have enough money to cover your expenses for 3 to 6 months. The assumption is that loss of income will not go beyond that but it can so you may want to do more. The thing with this money is you really want in a non-risky place to hold its value and that 3 or 6 months figure or whatever you have chosen. Having savings like this will help you weather the storm without drastically changing your lifestyle if at all. Just like the emergency fund, this can and should be built up bit by bit.
Short term investment
The emergency fund and savings fund are unpopular for obvious reasons. You put money in but because your concern with those in the safety of your money you likely put them in a place where there is little to no growth. Investment on the other hand is putting your money where it grows. Not all investments are created equal and that’s investments have been split into short term and long term. Short term investments have a time horizon of anything below one year though it’s feasible to stretch to three. Given circumstances in Zimbabwe, many people would want a good short term investment scenario that can give them return on their money within the foreseeable future. These can range from business ideas to unit trusts and sometimes shares. Remember with investment your money is at risk here.
Long term investment
Long term investments are places where you look for your money to grow but the outlook for the return on the money is 5 or more years out in the future. Generally speaking things like shares and real estate fit this well. Yes, I mentioned shares in the short term investments as well, they fit both. Investments like real estate are characterised by high entry thresholds; simply put you need a lot of money to get in. So they are not easy to get into. One can put them in investments like shares that require smaller amounts to enter and once the money is accumulated cash out of the shares for real estate. Point is, long term investments are part of the formula and one thing you should definitely be doing.
Pay off debt
Let’s approach this carefully. Debt is a big issue and if you are in debt and have just started earning clearing your debt will be top of your list. I would like to say two things. Firstly I do not discourage from paying off your debt, debt can get you in a lot of trouble legal or otherwise. Secondly, the reason why debt is not at the top of my list is that it is highly likely you got into debt because of a lack of financial stability. So paying off debt feels great but it doesn’t fix your underlying problem. Negotiate your debt payments where possible such that you can afford to pay at least as much into debt as you do into savings and investments. And once done pay off your debt. The advantage of this approach is achievable is that you improve your financial security as you reduce your debt. If your creditor is unreasonable consider borrowing from a reasonable lender to pay off the unreasonable creditor.
The specific amounts involved will differ with income levels of course. But even someone with a small amount can make great use of these tips. Consider someone who can save US$50 a month and divides the 50 across the 5 categories, assuming all 5 apply. Once the debt is paid off or the emergency and savings funds reach their target amounts the money can be divided between the remaining categories.
