Monday, May 27, 2024

Five ways you can start saving regardless of salary you earn

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In July 2021, financial analysis by EFG Hermes showed that Kenyans are the poorest savers in East Africa. The analysis established that the saving rate of Kenyans is also below the African continent’s average of 17 per cent.

Kenyans’ saving rate stands at 12 per cent. If you are struggling with saving money, how can you start saving more efficiently and consistently? Here are a few saving methods to guide you:

The percentage

The bare minimum you should save is at least 10 per cent of your income. This may vary depending on earning power and expenses.

George Mangs, the director at Market Cap Trainers, creating wealth through saving and compounding interest is possible where a saver strives to set aside up to 30 per cent of their income. But this might be too high for some savers, especially the beginners.

So you may want to try the 50:30:20 budgeting technique popularized by the US Senator in the book All Your Worth: The Ultimate Lifetime Money Plan.

In this budgeting method, 50 per cent of your income should go to your needs such as rent, transport, airtime, home internet, household and shopping items. 30 per cent of your income should go to self-development projects.

These include things about your body, mind, and soul that are necessary for your long-term well-being such as health, entertainment, networking, and family and friends relations. 20 per cent of your income should go into savings and investments.

Starve and stack method

This is a saving formula that is radically designed to help you save and build up capital speedily. Starving and stacking was formulated by personal finance advisor Nick Vail. It involves living well below your means and hiving off a significant percentage of your income until a particular financial goal is achieved.

“Unlike weekly savings and top ups of say Sh. 100 to Sh. 500, the starving and stacking method involves heavy amounts of savings that could be as much as half your monthly income,” says personal finance coach Daniel Mogaka.

To be successful with this method of saving, you may need to have two sources of income. Starving and stacking thrives where the saver has two incomes, or has a financial partner with whom they share financial obligations. This is where a spouse comes in handy!

“When using starving and stacking as a couple, you can decide that you will spend the first 18 to 24 months living completely off on one partner’s income while saving 100 per cent of the other partner’s income,” says Vail.

“For example, instead of using two incomes on all family needs, you will limit your total spending to an amount that can be covered with one income.”

Jones Nyaberi: I used Boda savings to build two 3-bedroom houses worth Sh. 1.5 million

Also, if you don’t have a partner, but have two incomes, you can dedicate part of, and, or the total of one income to meeting your needs and wants. You can then stack the total of the other income, and, or plus a portion of your side income away as savings for a prospective goal.

In Kenya, you will do well not to stack up this amount in a piggy bank or non-interest bank accounts such as the current account which earns low to zero interest.

“The least you can do is put it in an account that will earn you significant interest over the period you aspire to achieve your goal. Better still, you will do well if you can invest it in a mutual fund that has more competent interest rewards,” says Kibet.

The interest should be above the inflation rate. This means that the interest should be around 8 to 10 per cent. Starving and stacking money does not require that you always earn a huge salary in order to manage through it. It only means that you must live below your current means and maximize the amounts you put away.

Automating your savings is one of the ways you can ensure that you do not lose track or give up midway. “Once you automate your finances, the stipulated amount will be automatically transferred out of your checking account and deposited into your savings account the moment your salary is processed,” says Koech.

Delink your checking, business, salary, and savings accounts so that you are never tempted to dig out the amounts you save. Mr. Vail also says that you can also automate your finances in such a way that the bulk amount you save increases bit by bit monthly, quarterly, or annually.

52 Weeks Savings Challenge method

This is a group on Facebook that has a membership of over 400,000 people that provides savings options for beginners and advanced savers. The group is aimed at building a savings culture and maintaining wealth.

According to the group’s description by founder, moderator and personal finance coach Felista Wangari, members set financial goals and save money on a weekly basis for 52 weeks to achieve these money goals.

“This is a community of people who want to cultivate a culture of saving, investing and creating, growing and maintaining wealth. Here, you will share and get helpful ideas, discuss challenges and solutions and generally help yourself and other members reach their financial goals,” Felista says in the description.

The group follows a savings calendar that runs for one year, with members required to save a specific amount of money every week based on their saving abilities.

For example, beginners can be recommended to deposit or save Sh. 200 daily whereas more established savers can be recommended to save Sh. 1,500 weekly or Sh. 6,000 per month. By the end of the year, these basic options will accumulate to between Sh. 72,800 and Sh. 78,000.

If saved in a mutual fund earning about 10 per cent interest, the savings will have appreciated to between Sh. 80,008 and Sh. 85,800. Joining this group is free.

Money Market Fund method

Saving through the money market fund will give you better returns above the inflation rate. The MMF is secure, easy to withdraw from, and guarantees returns. However, you will need to do your due diligence as some funds such as the Amana MMF have cost savers and investors money. A money market fund that promises outrageously high returns is a very risky bet.

“Most funds invest in the same asset classes. The yields should fall within a certain range. A fund that outperforms the others by large margins means its manager is taking on more risks,” says Michael David, a financial and investment coach at MoneySense.

He points out that a fund that invests in commercial papers is the riskiest, followed by bank deposits. “The safest money market fund is that with the highest percentage of its fund invested in treasury bills,” he says. Treasury bills have a shorter duration and zero credit risk.

Mobile phone method

Saving through your mobile phone is a better alternative to saving in a piggy bank. It is also a stepping stone to saving in more advanced methods such as MMFs.

A number of local banks have partnered with telecommunication firms such as Safaricom to host interest-earning savings accounts on mobile phones.

Banks have also launched mobile apps that will allow you to save money even if you don’t have a bank account with them. Some of these include KCB M-Pesa, M-Shwari, Timiza, and MCoop Cash.

On these apps or your M-Pesa platform, you will have the option of locking your savings for a period of months based on your goals. You will get alerts urging you to deposit the target amount you set yourself every day, week or month.

The beauty of these platforms is that you can start by saving from as little as Sh. 50 daily discreetly and without shame.

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