Are you struggling to save money for your future? You’re not alone.
For most people, focusing on saving for the future is a top priority. The road to financial freedom can be long and challenging, but it all starts with developing a great saving plan.
Unfortunately, along the way, many people make innocent mistakes that derail their savings goals without even realising it. Recently, I was thinking of ways to improve my saving culture and decided to observe my friends. I was able to learn a lot and, in the process, also observed some saving mistakes they were making.
One of the best ways to improve your saving habit is to learn from the mistakes of others. In this article, I’ll share some of the mistakes I observed so you can avoid them and improve your savings culture.
When Akinyi graduated and started working, she needed to open a bank account like most people. And so she did. At first, this is where she could receive her salary, and keep her money safe and accessible. But over time, that account also became her saving account, and now all her cash is in a current account.
Using your current account as your savings account has multiple drawbacks, including:
- Low returns – Compared to other types of bank accounts and investments, such as savings accounts and fixed deposits, a current account will earn you less interest.
- Lack of diversification – Putting all your savings in one account is essentially putting all your eggs in one basket. While bank accounts are traditionally low-risk and insured, you should know that Kenya Deposit Insurance Corporation (KDIC) is mandated to provide insurance cover for deposit accounts up to a maximum of Ksh500,000.
- Hard to Track Your Savings Goal – Mixing your savings and spending makes it hard to track your goals and stay on track. Akinyi could be better off opening a different account to save for different goals and using her current account to keep her emergency funds and money she readily needs.
Njeri Never Meets Her Saving Goals
Njeri doesn’t have a budget and constantly has to dig into her savings to finance her bad habit – living beyond her means.
While Njeri has saving goals, she never meets them. For instance, she planned to save and buy a washing machine last year but ended up postponing the goal three times as she was behind her schedule.
Every time she tries to save, something else catches her eye, and she splurges and forgets her plan. Currently, she is well behind her most important savings: saving for a master’s degree and retirement.
Njeri needs to change her money habits if she’s to meet her goals, and that should start by:
- Creating a realistic budget that reflects her income and expenses.
- Prioritising her spending and identifying areas where she can cut back.
- Start tracking her expenses to see where her money is going.
- Avoid impulse purchases.
- Set savings goals and automate her savings.
- Find ways to increase her income, like taking on a side job or asking for a raise.
Wangari Thinks She’ll Get Rich by Just Saving
Wangari is 33 and has found relative stability in her career. She earns a gross salary of Ksh90,000 and currently has no dependents. On an average month, Wangari saves Ksh30,000, and over the past year, her savings have exponentially grown.
Wangari has a low-risk tolerance and values capital preservation. However, she falsely thinks saving money alone is enough. While she will accumulate a lot of money, prioritising savings and ignoring investing can be dangerous.
Some of those dangers include:
- Inflation risk – While saving money is a good habit, the returns are low, and they can’t combat inflation. As inflation rises, your money losses its purchasing power.
- Delay in Reaching Your Goal – When you put all your money in a saving account, it will sit there idly. But when you invest in it, it will work for you and generate more income. With increased income, your goal reaches your goals, such as buying a house or retiring while financially stable faster.
Mwangi Saves Whatever He’s Left With at The End of the Month
Mwangi is a 30-year-old teacher who makes Ksh65,000 per month. He struggles with saving money and often spends his entire salary on living expenses. This is because he considers saving an afterthought and only saves whatever is left over, which is usually not much. As a result, his savings are in shambles, and he often falls behind on his financial goals.
Mwangi needs to change his money attitude and prioritize savings to get back on track. He can do this by:
- Automating His Finances: An automated savings plan will allow Mwangi to set aside any amount he wants each month and save regularly. He can do this by scheduling a recurring deposit from his checking account into a linked savings account or a Sacco using standing orders.
- Pay himself first: This concept involves “saving before spending.” Mwangi needs to commit a portion of his salary and direct it to a savings/investment account before paying his monthly expenses/bills and making discretionary purchases.
Nasra Saves Money Blindly
Every month, Nasra saves 15% to 20% of her income. She has been doing this for years. She understands the importance of saving money and how it improves her financial well-being, from helping her stay debt free to building a cushion to fall back on in case of job loss.
But beyond those obvious reasons, Nasra has no other reason for saving. She doesn’t have specified financial goals she’s chasing, and whenever she needs to buy something, she simply digs into her savings.
While saving is good, a lack of saving goals can hurt your finances and prevent you from reaching your potential. If you are like Nasra and you don’t have any specific goals you are chasing, it might be time to:
- Improve your financial literacy to learn why just saving is not enough and why you need to start prioritising essential goals, including retirement planning.
- Talk to a financial advisor to help you formulate financial goals and give your savings a purpose.
Omondi Keeps All His Savings Locked Away
A few years ago, Omondi realised he had a bad spending habit preventing him from growing his savings. Every time he could save money, something could come up, and he could drain his savings. To fix these problems, he decided to distance himself from his savings by making his money less accessible.
While this is a good approach, Omondi went overboard. He locked all his savings in illiquid accounts like fixed deposits and treasury bonds. He barely has any cash except the money used for daily expenses.
If faced with an emergency, he’ll have to resort to liquidating his accounts and taking a loss or borrowing money. Both of these options can be costly.
So what can Omondi do?
- Diversify his savings accounts – Omondi must save money according to his goals. He can use treasury bonds for long-term purposes, like retirement and mortgage deposit savings. But he can consider a bank account or a money mutual fund for short-term goals such as emergency funds. This will ensure he maintains healthy liquidity.
Mutua Will Start Saving When He’s Older and Making More Money
Mutua, 25, is a recent graduate two years into his career. He earns Ksh70,000 per month but saves almost nothing. When I recently asked him why, he responded that he is too young to save and earning too little to save.
Mutua can barely save, not because he’s underearning but because he has inflated his lifestyle and leaving beyond his means. Over half of his income goes towards paying off his HELB and car loan, and the other half he spends on living expenses.
If Mutua doesn’t get his habit under control, it will likely spiral out of control and will probably come to haunt him in the future. For instance, he will have a hard time playing catch up to his savings goals as he’d have missed out on all the benefits of starting to save and invest in his 20s.
To get back in control of his finances and avoid future disasters, Mutua should:
- Start living below his means
- Get a financial accountability partner and avoid companies that influence him to waste money and neglect savings.
- Explore ways to increase his income so that he can sustain his lifestyle while also saving money.
- Avoid procrastination and start saving as little as he can ASAP!
Kipchoge Contributes the Bare Minimum to His NSSF
Kipchoge is an accountant and earns a Ksh75,000 gross salary. Every month, 3% of his salary is deducted from his payslip and sent to his NSSF account. When it comes to retirement savings, this is the only account Kipchoge has. He thinks the NSSF deductions on his payslip are enough when it comes to saving for retirement.
But he might be wrong. Given how quickly the cost of living is increasing and the fact that people are living longer, the payments Mutua will receive from NSSF when he retires might not be enough to support him when he retires. Therefore, he needs to:
- Increase his NSSF contribution to ensure he’s protected from inflation and to maximise his returns
- Take retirement planning more seriously and open other retirement savings account to lower his risk exposure
- Set goals and determine when he intends to retire and how much he’ll need to save to be able to retire comfortably
Article Source: https://www.money254.co.ke/post/8-saving-mistakes-i-learnt-by-observing-my-friends-money-and-me
