Savings: Living with Purpose and Compound Interest


Saturday, September 12, 2020 / 09:00 AM / Chinyere Onyia Header Image Credit: Pixabay



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Savings is a crucial tool for capital growth which further aids in economic growth and development through investments. Today many Nigerians live below the poverty line not just because they have low incomes or poor salaries, but perhaps because of the inability to imbibe a savings and investment culture.


According to the data released by the National Bureau of Statistics (NBS) on Consumption Expenditure Pattern, Nigerians spent N40.20 trillion on household consumption expenditure in 2019. This shows that many consume more than they save or invest, which is quite alarming for a developing nation.


In this age where there is a myriad of future investment plans, it is imperative for Nigerians especially the younger generation to cultivate a savings and investment habit, in order to grow wealth for the future. Irrespective of how little one earns; it is advisable to save at least 10-20 percent of your net income.  The concept of saving is mainly to mobilize funds for investment which leads to financial freedom and helps improve ones standard of living.


Some strategies for savings that can be adopted include putting aside "loose cash" into a wallet (physical or virtual) till it accumulates or setting aside a certain amount of money from income or salaries and depositing it into a savings account monthly. 


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Why Savings and Investment is Important

  1. It helps one enjoy the same or higher standard of living particularly after retirement.
  2. It helps to accumulate funds needed to acquire assets, such as landed property, buildings, etc.
  3. With savings or certain investment scheme one can take advantage of lower prices. For instance, during the festive seasons when sales are discounted.
  4. To prepare for emergencies or unforeseen eventualities like retrenchment, sickness, and natural disasters.
  5. In order to accumulate more capital which can earn additional income from interests if invested.


Gaining financial freedom will be unattainable without cultivating the habit of saving and investment. Even in the economic history of nations, it has been established that no nation grew economically without paying adequate attention to the twin concepts of saving and investment. It was theorized that for a nation to escape the vicious cycle of poverty which has held most underdeveloped nations captive, it must save and invest at least 12 percent of its gross domestic product or national income. 


Saving alone will not get any individual, firm or nation to that level. Each economic unit must invest its savings in viable vehicles that will multiply the income and savings. Only investment will significantly increase and multiply wealth because they are often subject to the law or principle of compound interest, which has been described as a man's greatest invention and the eighth wonder of the world.

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The Law of compound interest works on the basis and principle that interest earned on the investment itself earns interest such that the investor's funds keeps working for them endlessly even while they are taking time to rest - as long as the investment process is not terminated.


Here are different kinds of investments though this is not an exhaustive list but rather a summary of the possible schemes available for one to invest. They are: real assets investment, financial assets investment, and agriculture, entrepreneurship & education.



Investing in Real Asset - Fixing Cash flows

This kind of investment is focused on the acquisition of physical assets such as land, buildings, etc. Investments of this nature are capital intensive thus requiring large sum of money to venture into them, though they are often at lower risks. Real estate values often appreciates over time thus leading to higher cash flows from rental income or future sale. Often the demand for real estate increases as an economy grows thus serving as an investment that can be used to hedge inflation.



Financial Asset Investment - Baking a Clever Pie

Financial assets such as shares, bonds, mutual funds or other securities traded in the money and capital market are also forms of investment. While capital market securities are for a longer period usually more than a year, and offer higher returns because they are risker, money market instruments are usually less than a year and safer thus the reward is often lower but steady when compared with capital market instruments. In determining the kind of investment to venture into you should have clear goals, understand your risk tolerance and seek advice from experts in the financial markets industry in order to make the best investment decision.



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Entrepreneurship - Thinking and Creating

Entrepreneurship is also another means to invest ones savings in a lucrative business. This involves the conceptualisation and set up of a business venuture with the aim of turning around ones savings or capital from other sources into higher returns.


Starting a business and ensuring its viable requires interest, knowledge, skills and an ability to leverage on opportunities. With the rate of unemployment in the country and the rise of ecommerce driven by technology, many can commence trading activities with minimum capital.



Investing in Agriculture - Going Green for Profit

Agriculture is one of the most lucrative sectors in Nigeria with the potential for so much more as the country further develops. The agriculture sector is mainly driven by the plans of the government to diversify the economy. As a result, the sector is greatly attractive to investors from within and outside the country. Read more on Investment Opportunities in the Agricuture Sector HERE



Education - Making Brains Count

This is essentially long term and is usually the best form of investment, as it represents an investment in the human mind, which improves human capital. It may be academic, professional, vocational or thorough on-the-job courses. 


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The importance of savings and investment cannot be overemphasized, because it is the pathway to financial freedom.  It all begins by determining to take action about investing in yourself, in viable investment vehicles and also in others.


Regardless of how small your income may be now, saving first should be your priority. Like Warren Buffet advised, "Do not save what is left after spending, but spend what is left after saving."


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