Savings is a critical part of personal financial well-being as it is the bedrock for growing future wealth. This is so for a number of reason; the first and obvious one being that, it helps to guard against wastage of financial resources. The opposite of savings therefore is what I call “financial wastage” or “destruction of potential financial value”. Think of savings as the portion of a farmer’s produce which is stored away for use in the next planting season to produce more crops in the future that will ensure the continued existence of not just human beings but livestock as well. If we think about it, even nature has a savings culture or system that allows continuation of life as we see it.
Therefore, the practice of savings entails the deliberate act of setting apart a portion of all your income so that it will be available for use in the future especially if it is deployed into any sort of investment that would yield a return which will preserve the value of money for future use.
Having described and defined savings is, let us take note of the word, preserve. This is because savings is not just the act of setting aside a portion of money, merely for the sake of doing so, but so that its value will be preserved in just the same state or even a greater state than it once held. So, we ask the question: preservation from what? The number one destroyer of value is inflation.
To explain simply, inflation is that factor which causes yesterday’s N100 for 2 packs of gala sausage snack to become today’s N100 for 1 pack of gala sausage – a clear destruction of value for consumers of gala. Of course, this value destruction happens to the entire basket of goods and services being measured per time. So, for all intents and purposes, guarding against inflation negates the idea of holding physical cash which is susceptible to destruction, but instead, using an interest yielding investment that gives the saver an interest rate greater than the rate of inflation. And there are several investment products available which can help preserve value of savings and which we shall explore further in the next article.
By Victor Ofili