14. Savings: questions to ask yourself

Not all our expenses occur on the day we receive our income. This time lag forces us to set aside money, or in financial terms, to save. Otherwise, we will either have to forgo these expenses or borrow to pay for them. How can we save?

Let’s review what we have learned in the previous lessons about saving:

1. List your commitments and goals – whether they are short term (next month’s electricity bill) or long term (example: your child’s university in 10 years). (lesson 4 and lesson 6).
2. Write your budget and prioritise expenses to keep money for these commitments and goals. (lesson 6), including unforseen events (lesson 7).
3. Track your ins and outs and follow your budget (lessons 1, 5 and 7).

With your budget, you can calculate how much to save and when you’ll use those savings (“unsaving“). If you’re starting to feel comfortable with budgeting, take it a step further and budget for the entire year. This will allow you to anticipate major yearlyexpenses and fluctuations in your savings.

What should you do with these savings? Where should you invest them? Who should you entrust them to? There’s no simple answer. It all depends on many factors. That’s what we’ll explore throughout this third part. Let’s start with the basics: the questions to ask yourself.

Questions to ask yourself:

📆Question 1: when will you need this money?

• For example, if you need it in several weeks to pay for your rent, buying a plot of land is not a good idea. Keep it where you can get it back easily… On the other hand, if you plan to use the amount in twenty years for your old days, the plot of land may make more sense.

💰Question 2: Will it be easy to convert your investment into cash when you need it?

• If, for example, the money is in a bank, it’s easy to ask the bank to access those savings (it’s already money). On the other hand, if you’ve invested in a friend’s business or bought land, you’ll have to sell your share or the land to get cash… and selling means buying: so everything depends on whether you find a buyer, how quickly, and what price they’re willing to pay.
• This ease of exiting an investment and converting it into cash is called liquidity: an investment that’s easy to sell (liquidate) is liquid.

⚠️Question 3: How likely are you to get it back?

• Savings and investing are risky… just like life: if you buy gold jewels, they may be stolen, if you invest in a friend’s business, the business may thrive… or go bankrupt. Inquire about the potential risks before taking a decision.
• So why not just keep that money on you? Because that’s very risky too! Money can be stolen… The biggest risk is that it will be spent quickly! If you keep your rent money in your wallet to pay in a few weeks, it might end up in the shops. It’s therefore wiser to keep it in your bank account or on your mobile phone (if you use digital money), or invest it.

📈Question 4: How much will you get back? 

•  If you leave your money in a bank account or as mobile money, you will most likely get back what you have left. But, over time you can buy less with it: this is what we call “inflation”… prices go up and our $1 cannot buy any longer what they could two or three years ago  – our money has lost purchase power.
• So for long term goals, it is better to invest ; what is investing? It is to make our money flow to businesses (investment or loan), governments (loan) or other people in exchange of lasting valuable items (land, house, jewels, cattle…), and get it back later: after a few years, you may get a bigger flow… or a smaller one. How much you’ll get when you sell that investment, compared to how much you paid for it, is called the return.
• Some investments generate income while you own them (before you sell them). This improves their return. We’ll see this in the next lessons.

Before investing, you should therefore research the risks, potential returns, and liquidity of an investment. Understanding the cash flows of an investment (where the money comes from, where it goes) helps you understand these three characteristics (risk, return, and liquidity).

Difference between savings and investments :

To put into practice:

1. Calculate your 12-month budget.
2. Calculate your goals beyond 12 months.
3. Analyse your list of savings goals and prioritise them according to when you will need them (within 12 months, less than 3 to 5 years, more than 5 years).

For example:

• Savings for a down payment on a home: €1,000 every month for 3 years
• Savings for emergencies: €10,000 already saved – can be used at any time
• Savings for children’s education: €500 every month for 15 years
• Savings for a trip: €300 every month for 7 months, then withdraw from the savings

This sample list will help you decide where and how much to invest your savings.