What then is Saving? Saving is:
a) Income not spent or
b) Deferred consumption
As a follow up to my previous blogs on 'The Only Financial Rule You Have To Live By (Part 1 & 2)', I would want to say that the first definition of saving is adequately dealt with there. For the purpose of emphasis however I would restate that Income not spent is money deducted from ones pay check or salary for the purpose of increasing your assets or net worth. It could also be money kept aside for contingencies which were not used within the specified period which is laid aside for investment purposes. Read more about this on my previous write up.
Deferred consumption on the other hand is delaying the purchase of something (a car, a shirt, going out for 'point and kill', making your hair, sewing a new cloth etc) that you can afford today, save the income from the deferred consumption and invest the income. The reason for this is to enable have enough to buy more of the item deferred in the future.
I will give you an example to buttress this point. A man from eastern Nigeria in 1974 had N4,000 and wanted to buy a brand new Peugeot 504 (this was the definition of class then). He already had a Volkswagen Beetle but needed an upgrade, a friend he entrusted with the information advised him to continue using the Volkswagen Beetle and invest the money he would have used for the purchase. This was a difficult decision for him but because he respected the source of the advice, he invested the money.
He literally forgot the investment until sometime in the year 2000 AD. At this time he actually needed money for something and got financial experts to evaluate the investment; to his shock it was worth over N112,000,000 (this could buy more than 50 brand new vehicles in 2000AD). Note if he had bought the Peugeot in 1974, most probably in the 80's the vehicle would have become a scrap.
By investing this money in a long term investment, he was able to grow so much wealth than he could imagine. the point I am making her is:
To be able to live a wealthy life style without stealing or defrauding others, your goal must be to:
- Earn income: Put yourself to work
- Save a part of your income (10% only): Make it a practice to save money. The percentage you save is immaterial. What is important is that you are saving money and at the same time developing the discipline to save.
- Invest your savings safely and wisely over a long term period: Make sure you invest the save income. Don't save money and thereafter expend the money for your up keep. INVESTMENT is the key word here.
Note that the home truth here is that your daily choices and decisions determine the quality of wealth you will achieve. The quality of wealth you get on the other hand will determine:
- The information you get
- The habits you cultivates
- The discipline you maintain
Aim to be a passive investor and understand that money grows by the principles of compound interest and not simple interest. That is the principle that can make the N10, 000.00 you have today if invested in a place that gives an averages returns on investment of 35% passively every year after a period of 25 years to become N18 million (eighteen million naira).
Don't get scared as it is real and you can do it.
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