Saving and Investing
Welcome to Jamii’s Newsletter!
Key Takeaways:
Always know your goals - are you holding your assets for the long term or the short term?
Saving is usually for the short term and involves lower risk and lower return. Investing is usually for the long term and involves higher risk and higher returns.
*Click on the links for additional information.
Why Save?
“The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind” T.T. Munger
Saving is the first step to financial independence. Many experts agree that saving alters new savers’ lifestyles and that to manage money properly, one has to build their lives around saving - hence quotes such as the famous Warren Buffett’s: “Do not save what is left after spending, but spend what is left after saving”. Once you have altered your lifestyle to allow consistent savings, the next step is investing your savings so that you can achieve higher returns.
Savings Accounts such as High Yield Savings Accounts (HYSA) and Certificate of Deposit (CD) accounts allow you to financially plan for future goals and prepare for emergencies. With a little money set aside every month, you can save up for a vacation, wedding, car, or whatever might require a huge lump sum. Additionally, saving allows you to have peace of mind; life brings along so many unexpected emergencies - medical emergencies, unexpected job loss, and more. Unforeseen occurrences could easily leave you in huge amounts of debt. Having a safety net helps ease the undue stress brought on by life’s unexpected emergencies. Before making a decision about CD or HYS accounts, compare the different rates across banks.
The Case for Investing
While saving is a great starting point to financial freedom, keeping all of your money in a savings account lowers your chances of growing wealth since, over time, inflation erodes the value of your money. To help understand inflation, think about any commodity you purchase regularly, a bottle of soda for example. In 2008 a 300ml bottle of soda went for Rwf250 and today the same bottle of soda would cost you Rwf400. In those 12 years, the purchasing power of Rwf250 fell by a factor of 1.6.
Time Value of Money
Most investors prefer to capitalize on the power of compounding to grow wealth and escape the effects of inflation on their money. The concept that money today is worth more than in the future is called the Time Value of Money (TVM). To illustrate, if you were offered 1 million francs today versus 1 million francs in the future, you would probably choose the 1 million francs today because of its higher utility. In addition, since money can earn compound interest, it is more valuable to have it today than in the future as suffice it to say, time is an essential component of compounding. Numerous calculators online can give you a sense of how much you could invest now, at a certain interest rate to make a certain return in the future.
Assume a sum of Rwf10,000 is invested for 5 years at 10% interest, compounding annually. At the end of the 5 years, you would have Rwf16,105, Rwf6,105 more money than you initially invested.
FV = Rwf10,000 x [1 + (10% )] ^ (5) = Rwf16,105
Watch this video to learn more about the power of compound interest:
So, How Can You Preserve And Increase Your Money’s Value Over Time?
Although investing is riskier than saving, it offers relief from the effects of inflation as investing typically generates higher returns. The most common long-term investments are index funds, stocks, assets such as gold, land, real estate, and bonds. With time and interest, compounding works wonders for your investment, a fact that some young Rwandans have realized and are taking advantage of. Janvier, a 25-year-old who lives in Musanze, shared with us how he got started in the stock market: “I had been waiting for an entry point. In 2015, Crystal Ventures offered the shares it had in MTN Rwanda to the public. There was an entry point I was waiting for...I bought the stock hoping that it would be the first of many. My concern is that the majority of Rwandans have not yet bought into the idea of trading stocks, which hampers the development of our stock market.”