Saving has not been the centre of African culture and it is one such thing that is necessary but rare. The perception among Africans is that saving is for those that have money. But how did they get to be the ones with the money.
In most cases during times of crisis people borrow or sell their valuable properties in order to finance the crisis. To those that can relate with the above statement you can recall the moments you sold your phone, car, house or TV at a value below the market price because you were desperate and you could not wait to get a buyer with a good offer. This happens if saving has not been done. Saving has not been encouraged or instilled in our culture as one core ethic.
A lot of people fail to save for their future consumption and they would rather borrow for consumption. Once one starts borrowing for consumption he/she is already consuming into their future period. To make this simple try to Imagine yourself earning $500 per month and you borrow $200 that very same month. Next month your salary comes and you pay back $200 that you borrowed. Now you are left with $300 and you are already $200 less the money you earn. In order to finance your budget, you borrow another $200. Once you start borrowing, the next period you will have to pay back if not borrow again.
Borrowing will then become a monthly activity. You consume today what you should consume next month. One cannot survive by digging a hole in order to fill another hole. When consumption becomes all that matters one should know that they are headed nowhere as far as financial freedom is concerned. In case one has failed to save, let them not borrow for consumption at least.
Borrowing should be for profit and profit generation – when one borrows it should be to invest there by giving you a profit. Or to buy something that can generate income. For example, one borrows to buy a taxi. Once the taxi starts operating, the debt can now be paid back. More like one can not dip into their personal income to pay the debt.
Reasons for Saving
- Savings help in situations of emergency. Some situations do not announce their coming and once they occur and one is not prepared the worst that can happen is selling valuables at prices below the market price.
One can only invest after they have saved. Investment follows saving. Once one has saved they now have a base of investment. The money saved can then be invested. This also adds to the income streams of the investor. Thus, one can now have more to save from.
- Consumption Smoothing
No individual is going to work for the rest of their life therefore there is need to save now in order to finance future consumption. If you are already borrowing for consumption now when are economically active, what then shall you do when you are no longer economically active?
Save your way out, save to invest, save for crisis, save for consumption smoothing.
Next article will be on practicals of Saving. It will answer the question of how to save in this current economic environment.
Mitchell K. Name
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