Introduction

Since time immemorial, humans and animals alike have understood the wisdom of gathering resources when there was plentiful and storing them for times of scarcity. Our ancestors who lived in the tropics gathered food, firewood and other necessities in preparation for winter. Similarly, animals like ants and squirrels stockpile food for winter while others bulk and build up fat reserves to sustain them during their winter hibernation. Our ancestors understood that winter wasn't the only concern - hard times such drought, floods, war and other disasters could arise unexpectedly, and it was wise to be prepared for it.

In today's world, we defied nature's script by building ourselves a concrete jungle and a money economy which assures us that we can always purchase the resources we lack in exchange for money, as long as we have a steady income. However, the recent COVID-19 pandemic reminded us that job security and economic stability can vanish in an instant. Many are still feeling the impact today. It's time to revisit the wisdom of our ancestors and prepare ourselves for future uncertainty.

How can we protect ourselves financially in times of crisis? Let’s explore how saving and investing can help us secure our financial future.

Save, save, save!

The most obvious way to future-proof oneself is to save. In today’s consumer-driven world, this is easier said than done. From tantalizing product displays on the streets to ads and envy-inducing social media posts, we are constantly tempted to spend. But it is crucial to set aside a portion of your earnings for savings. While the exact amount depends on your financial situation, it’s generally recommended to save at least 20% of your income. The goal is to have a cushion—ideally, enough to cover at least two months of living expenses, in case of unexpected job loss or other disruptions.

Your savings should be placed somewhere you can’t easily access them for daily expenses—like a savings account or a different type of deposit.

But money "rots"!

Just like grains in granaries are susceptible to rot and vermin, your savings are vulnerable to inflation.

Inflation - the gradual loss of the purchasing power of money, reflected in the general increase of prices for goods and services over time ¹.

If the inflation is 5% per annum, what cost around KSh. 100 last year now costs KSh. 105 this year. Kenya's inflation rate was as high as 9.23% in Feb 2023 but has been declining to 5% in October 2024 according to the Central Bank of Kenya ². Official inflation rates are usually published by central and government banks. While government banks may try to smooth over inflation numbers to make the government look good (people don't appreciate high inflation) the reality is that inflation erodes the value of your money over time.

And then there is the vermin of the financial world, that take the form of opaque bank charges and exploitative transaction fees. Many people often find unexpected bank charges such as "maintenance", "administrative" fees deducted from their account. The banks could simply change their terms and policies when they feel like it and add fees literally the next morning. Other financial institutions like MPesa, Kenya's most used mobile banking platform, instead charge high transfer or withdrawal fees, which can even reach 11% for small transactions. Just like rats and vermin, they nibble away at your bank savings.

If you are not out-running inflation, you are losing money!

Generally, savings accounts do not work in your favour unless your bank savings account is offering you a net interest rate greater than your country's rate of inflation. By net interest rate, I mean the effective interest rate after the withholding tax deducted at source and the surprise fees in the fine print you probably didn't read. There probably is a percentage management and administrative fee somewhere in there and perhaps even a withdrawal fee, so you shouldn't trust the juicy advertised interest rates on billboards or brochures too much.

Banks aren't doing you a favour!

Banks present themselves as the safe keepers of your money, but in reality, they are financial intermediaries that make money off your deposits. When you deposit funds, banks aggregate your money with other deposits and lend it out to borrowers in bulk and for longer, earning a profit from the difference between the interest they charge borrowers and the interest they pay you (the net interest margin). This process is called maturity transformation. Often, the interest they offer is much lower than inflation rates, treasury bill rates and central bank rates, leaving your savings stagnant or eroding in value. If banks use your funds to make a profit, they should compensate you fairly!

Don't save, invest!

If saving alone doesn’t protect your wealth from inflation, what can you do? The answer is simple: invest. By investing, you allow your money to grow and generate a return, counteracting inflation and increasing your wealth.

Invest - to commit money or capital in order to gain a financial return (profit) ³

As Robert Kiyosaki, author of "Rich Dad, Poor Dad" and "The Cashflow Quadrant", advises, investing in financial assets that generate passive income is the path to financial freedom.

A Glimpse of Investment Options

While there are many ways to invest your money, some of the most common options include:

1. Starting a business - identify a market gap or profitable venture, register a company and start trading.

2. Real estate - purchasing or constructing in residential or commercial real estate properties that generate income through rentals or capital appreciation. Alternatively, one could invest in Real Estate Investment Trusts (REITs) which have a lower capital barrier to entry.

3. Stocks and Equities - Investing in shares of companies on the stock exchange to benefit from growth (capital gains) and dividends.

4. Treasury Bills and Bonds - Low-risk government securities offering steady returns over time.

5. Money Market Funds (MMFs) - relatively low-risk, and highly liquid investments that compound daily and have competitive returns.

6. Foreign exchange (forex) - a market that participants buy, sell, hedge and speculate on the exchange rates between currency pairs e.g. EUR/USD

7. Cryptocurrency - A more speculative but rapidly growing market with high potential returns offering crypto swaps with both crypto and fiat, as well as speculating on cryptocurrency pairs.

8. Derivatives market - a market for trading, hedging and speculating of derivatives, which "derive" their value from underlying commodities like minerals or agricultural produce.

9. Savings and Credit Cooperative Societies (SACCOs) - Member-based institutions that offer dividends on contributions, loans with favourable terms, savings products with attractive interest rates, and financial services like insurance and ATM cards.

10. Financial markets - markets where participants (individuals, organisations and governments) with excess funds (lenders-savers) lend money to other participants in need of funds (borrowers-spenders)

11. Mutual Funds & ETFs - Pooled funds that allow you to invest in a diversified portfolio of assets.

By exploring these diverse investment options, you can secure your future. Stay tuned for detailed breakdowns of each option and subscribe now to the Finance Friday newsletter!

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References

^[1] Fernando, J. (2024). Inflation: What It Is and How to Control Inflation Rates. Retrieved November 8, 2024, from Investopedia website: https://www.investopedia.com/terms/i/inflation.asp

^[2] Inflation Rates | CBK. (2022). Retrieved November 8, 2024, from Centralbank.go.ke website: https://www.centralbank.go.ke/inflation-rates/

^[3] invest — definition, examples, related words and more at Wordnik. (2024). Retrieved November 8, 2024, from Wordnik.com website: https://www.wordnik.com/words/invest

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