Savings for the purpose of this discussion is “ones disposable income that is not consumed by immediately buying goods and services”. That is, deferred enjoyment of your income.
In everyday language, savings is that money you have plans for and decide not to use it for anything today. Savings is a very difficult habit to cultivate and as such, there is the need for some basic facts to be learnt. Every genuine saving starts with a bank account or a source.
No one can efficiently claim to save without a bank account where either daily, weekly or monthly income can be deposited or “hidden” for future enjoyment.
We all have goals and dreams in life, which are mostly futuristic. Most of these goals can be realized with money and as such, its important that we plan our lives well today towards that goal. Some of these goals may be;
- Buying or building a house
- Purchasing a car
- Education
- Travelling
- Retirement package
- Marriage etc
Saving money in mathematical sense means addition of income. So an income of GHS 500 for the month of June 2018 can be added to another GHS 500 in July. This may bring your total savings to GHS 1,000 for the two months. In as much as this may be a good initiative, it still lacks the spark of excellence and wealth.
To create wealth, one may decide to graduate from savings to investment.
Investment is simply putting money into something with the expectation of a gain. That is, the use of money with the hope of getting more money. The Holy Scriptures captures investment in Matthew 25:14-30 when Jesus Christ used the parable of the three servants with talents.
Savings can only deliver you from Egypt to the shore of the Red Sea. It however cannot help you to cross. Investing your savings is the key to crossing the Red Sea.
Investment that will lead to riches is one that is done regularly for long periods. Every investment has an element of risk so do not take unnecessary risk with your money. When you put your savings to work, we call that Investment.
Before you think of investing your savings, the following factors must be looked at thoroughly:
- Yield(returns)
- Safety of investment
- Liquidity(ability to convert investment into cash)
- Time Horizon(period of investment)
For the first part of today’s discussion, I will only tackle yield on investment in the light of collapsing financial institutions in Ghana.
Yield basically means the interest or returns on your investment. There are 3 main components that determines the average returns on investment in Ghana in the field of general banking. General banking here means investing in the Universal banks, Savings and Loans, Microfinance, Credit Union, Investment Houses and any other related companies.
The components are the prevailing Treasury Bills rate, Central Bank Policy rate and Inflation.
Treasury Bills for those reading for the very first time is the return the Central bank gives when you decide to invest with them. This investment with the Central is done through the commercial banks who act as principal and secondary agents. The Central bank twerk these rates to control money supply in the economy. In simple language, if the Central bank wants a lot money in the economy, it will reduce the treasury bills to discourage people from investing directly with them hence, rather investing their monies in other business ventures.
Now the question is, how does this treasury bill affect the returns on my investment. Apart from the direct linkage as I said above of low or high return, all investing institutions aforementioned also fix their investment rates around the treasury bill. The treasury bills therefore becomes the benchmark for the return on your investment.
The higher the treasury bill rate, the higher rate offered by all other institutions in general banking. Most institutions depending on the line of business can offer between 10% -20% margin above this rate. Most universal banks however don’t go beyond 8-10% of the treasury bills due to the ripple effect on the cost of loans.
The universal bank equivalence of treasury bills is called Fixed deposit or Term investment.
When we crave for more interest on our investments, we call for high cost of living as business loans in the country will also be expensive. These businesses will also offload the extra cost to the final consumer who is already enjoying high returns on his investment.
The yield factor is therefore a very important factor to be considered when you decide to invest your savings. Most smart and wicked financial people play on the human crave for more by sometimes offering unrealistic returns to many investors even when the existing treasury bill rate doesn’t support it. Most of these companies end up running away with peoples’ hard earned savings.
In recent times, several examples can be seen and felt all around us. Am not here to collapse and chastise any business. But having little financial market knowledge before investing your hard earned savings will save you a great deal of sorrow.
I shall return next week to explain the second component that determines the yield on our investment i.e Policy rate.
Patrick is a chartered banker and has been a qualified member of the Chartered Institute of Bankers, Ghana with a good membership standing since the year 2013.
