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It has been pretty difficult to determine the appropriate amount for savings to guarantee what a secured future should be. So, how much an individual should save to guarantee a comfortable and strong financial future has been a debate since the beginning of mankind. Some have argued that it should be a percentage of one’s income, while others say it should be as much as one can. Both arguments have their strengths but could be reviewed on and on and on.
The answer to how much one should save is simple – as much as one can afford. The lion eats as much as he can, because he is not certain of his next meal. Just like the lion, your future is not certain, and so the more you stock up now, the better for your future.
Having said that, everyone has different needs and circumstances that should determine how much he is able to save. If you save N50 per month on a salary of N500, you are doing well, but if this is all you can afford to save on a salary of N5, 000 per month, then you need to examine your expenses carefully and see where you can “cut back”.
A great tip is to save between 10 percent and 15 percent of your monthly salary. If that is too much, start with what you can afford. It is better to start earlier rather than later and with a smaller amount rather than not at all. You can always increase the amount later, when you can afford more.
Many a times, the challenge people have is where to save this money. There are thousands of options, with different degrees of risk. When you start saving, you want to make sure your money is safe and earns good interest. Some investments go up in value very quickly, but can also just as easily lose a lot of their value. These are called “high risk” investments. Until your savings plans are well under way, it is best to steer clear of them. Remember the saying, “If it sounds too good to be true – it probably is.”
Many people have been cheated out of savings by promises of doubling their money quickly. It is easy to be tempted by promises of getting rich, but in reality, people investing in “get rich quick” schemes lose their money fast.
If you are starting to save, begin by putting your money into safe investments such as those offered by the banks or insurance investment products which have interest guarantees. Once you have got into the savings habit, you can look at other investments. Read about some of these options and think about the questions that follow.
1. The Piggy Bank or Mattress Method
This is a very high-risk way to save money. If you hide your money in your cupboard, under the mattress, or in a piggy bank, it could easily be stolen or destroyed by e.g. fire. Your money cannot grow, as it will earn no interest at all, but the highest risk of all is that you will be tempted to use it. This is not a wise investment.
2. The Savings Club
Savings Clubs, also known as stokvels, burial societies, etc. are a popular means of saving money. Members usually know each other well, and contribute a certain amount each month. Members encourage each other, so it becomes easier to save. Members usually take turns to get a lump sum out.
Often no interest is paid on the savings, and it usually runs on a trust basis. There are usually no written contracts and no protection if your money is stolen. This could be a useful way of saving for something in the shorter term, but you should also have your own savings plan and accounts. This method is useful for short-term savings.
3. A Savings Account at a Bank
This is a good way to start a savings plan. It is relatively easy to open, and you can usually access your savings account through an ATM card. You will probably need to keep a minimum amount of money in it to keep it open. There are usually no restrictions about when you can withdraw your money. A savings account doesn’t earn much interest. A good way to start saving your money!
4. Notice Deposits
You can invest your money at the bank at a better rate of interest if you take out a notice deposit. Depending on the terms of the account, you will have to give the bank the required period of notice, usually 32 or 60 days, if you want to withdraw your savings. Useful for saving a lump sum that you need in the future.
5. Fixed Deposit
Once you have accumulated a certain amount of savings, you might want to invest a lump sum at a higher rate of interest with your bank or the post office.
This means that your savings will grow more than in a savings account, but you will not be able to withdraw it for a fixed period of time, e.g. 6 months, or 1 year, depending on the terms. A safe way of saving for the medium to longer term.
6. Government Bonds
Bonds are a safe, risk-free way to save money for the medium term. They are fixed-term investments with a fixed interest rate, as decided on the day you purchase the bond. You can withdraw your money before maturity date, but you will have to pay a penalty, so try not to do it. A good medium-term investment.
7. Retirement Annuities (RAs)
There are two main ways to save for retirement. If your are part of the contributory pension scheme, you will probably be having some money saved for you through your employer. If not, a good option is to take out a retirement annuity policy with an insurance company. This is a contract where you pay an amount each month into the account, and the insurance company invests it wisely and makes it grow for you. On retirement – usually at age 55 or 60 — you will get paid out a monthly pension for the rest of your life. (You will also be able to take a lump sum depending on the plan.
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