The terms “saving” and “investing” are used frequently when we talk about personal financial management. Many people often wonder whether there is a difference between the two terms. Yes, there is.
Let us say that you plan to eat potatoes next week. Saving will enable you to put aside money to buy the potatoes.
Investing will show you how to grow potatoes. It will provide you with the skill, the seed, and even the land to continuously grow potatoes in the longer term.
That way, your ability to eat potatoes is not reliant on your saving or working.
How to save
Many people wonder how to start saving. It is simple: Spend less money than you earn and regularly put that money aside.
You can open a savings account with your bank and start accumulating funds there.
Do not wait to know all about the perfect savings vehicle or investment before you start saving. Just ensure that it is a separate account from your day-to-day transactional account.
When you get paid, put the money you intend to save in this account before you start spending. Do not wait for it to be there at the end of the month. Remember, no amount is too little to save.
Saving towards a goal
You could save for expenses that need to be met in the near future, like school fees for the next term or car insurance expenses.
You could save for large purchases you may want to make, like a car, a deposit on a house, and so on. You could save for emergencies such as unexpected medical expenses, personal losses, or loss of employment.
As you can tell with all these reasons, money needs to be available. Car insurance or school fees cannot be paid if your money is tied up in a plot of land. Therefore, you will need to keep money relatively safe and in a place where it can be accessed when you need it.
Your savings may earn you some interest, but you will not really be counting on returns to fund the expenses.
The last reason you might save is to build up enough funds to pursue various investments. Investing takes saving a step further by enabling you to build wealth in the long-term.
Investments require research and willingness to spend time learning about the various instruments you can use.
Your investments ultimately allow you to do two things: To grow the value of your funds and to generate income. Rather than continuously saving to go buy potatoes from somebody else, investing allows you to acquire the land to keep growing the potatoes for as long as you want to eat potatoes.
As you take care of the land and your plants, the land keeps generating more and more potatoes for you. When you get tired of eating potatoes you can sell it and acquire land that produces tomatoes.
Investing, in a nutshell, is what will get you to financial independence.
The “land” that we are using in this analogy could be various things — it could be a business, shares, property and so on.
You can buy a share at Shs10 and sell it later for Shs20. You have made an extra Shs10 by simply knowing which share to buy. You could start a business with Shs100,000 and every year, that business gives you Shs50,000.
Money in this case, is working for you because you are not just using money to meet future expenses, but making the money generate money.
Waceke runs a programme on personal financial management. Find her on:firstname.lastname@example.org