The Art Of Saving To Improve Financial Health
In Nigeria, nowadays, it can feel like a tremendous effort attempting to put money aside for a rainy day.
In October 2022 the National Bureau of Statistics (NBS) explained that rising inflation rate was caused by soaring food prices, disruption in food supply chain, rise in import cost due to the currency depreciation, and increase in the cost of production. In November 2022, as reported by the NBS, the country’s headline inflation hit a 17-year high, at 21.47 percent; the highest recorded since September 2005 and at least 6.07 per cent higher than what was recorded in November 2021. This eased to 21.34% in December of 2022 with the decrease attributed to slight deceleration in prices of food. Whilst this is good news and hopefully the trend continues downwards, the reality today is that many Nigerians are currently facing, living paycheck to paycheck. This reality exists at all socioeconomic levels. Furthermore, people in this category are affected the most during economic downturns, and crises that occur in their personal life because they have no cushion.
Savings as an important step to financial wellbeing.
To make an attempt at saving one must understand that finance is highly personal and whatever approach that's adopted is unique to ones own personal circumstances.
Also it is worth being completely transparent and honest with ones expenditure and income, perhaps tracking it for a month or two before one starts, so the most appropriate savings approach can be embarked on.
Let's attempt to briefly describe some popular budgeting & savings approaches that could help you on your way:
The 50/30/20 rule.
This is a popular budgeting method that splits your monthly net income among three main categories: Needs, Wants, Savings & Debt. Note that you should remove any automatic deductions relating to health insurance and pension as these could be captured in, for example, the savings category. Here's how it works.
50% to Needs - These are what you can’t live without, or at least not very easily. They include things like:
- Rent
- Groceries
- Utilities, such as electricity, water, and fuel (petrol, gas, charcoal, kerosene, diesel)
- Minimum loan payments - anything beyond the minimum goes into the savings & debt repayment category
- House help or other expenses that need to be covered so you can work
30% to Wants - These are what you desire but don’t actually need in order to survive. They might include:
- Dining out
- Digital and streaming services like DStv and Netflix
- Monthly subscriptions
- Entertainment
- Hobbies
- Vacations
20% to Savings & Debt - These are about paying down existing debt and creating a financial cushion. This part of your budget is pretty bespoke as it depends on your situation, but it will likely include:
- Starting and growing an emergency fund
- Saving for retirement through a company sponsored or private retirement scheme
- Saving for a house, vehicle, generator
- Paying off debt, beginning with high interest accounts like credit cards or loans
Example of this approach in action - say you earn ₦90,000 monthly after tax (net).
Needs: ₦90,000 x (50/100) = ₦45,000;
Wants: ₦90,000 x (30/100) = ₦27,000;
Savings & Debt: ₦90,000 x (20/100) = ₦18,000 (which one can further subdivide as required e.g. 50:50 or 60:40 or 30:70 etc.)
The 70:30 rule; 70:20|10.
This allows you more flexibility with how you spend by just setting some parameters to adhere to.
Money for expenses: This refers to what you do with 70% of your net income every month. That means if you receive ₦90,000 monthly, you would take 70% of that, or ₦63,000, and use that to cover all of your expenses. Whatever your monthly income, 70% is the maximum amount you can spend on bills, groceries, petrol, diesel, kerosene, rent, utilities, entertainment, clothes, transportation, etc. If your current spending exceeds 70% of your net income, then cut out as many unnecessary activities as possible, e.g. consider moving to a cheaper area or using cheaper modes of transport. Basically do whatever you can to get down to 70%. If you don’t need 70% of what you earn, instead of spending it, fit it into one of the other two categories.
Savings: The remaining 30% is actually divided into two categories: 20% toward savings & debt and 10% for charities or investments. Using our previous example, 20% of ₦90,000 would give you ₦18,000 a month for saving and debt payoff. Whatever the amount, the action is the same. The purpose, here, is to build an emergency reserve. If you can’t afford to do 20% yet, then just put away as much as you can and build it up to 20% over time by either having a side hustle to earn more income or cutting your expenses. Always paying off high interest debt as quickly as possible should be your first priority.
Donating or investing: - Whether tithing is something you believe in, want to invest in your own future or just want to give to a cause you care about, the remaining 10% should go here. Using our example 10% of ₦90,000 will give ₦9,000 a month; this could be put into a retirement account, used to buy stocks and bonds, or other investments. Or you can donate to a religious institution you attend or a cause you care about.
Zero-based budgeting.
In this approach your income minus your expenditures should equal zero. Needs and wants, savings goals and debt payments are all included. The idea behind the zero-based budget, sometimes is to give every naira a purpose. Here’s how it works.
Let’s say you make ₦90,000 per month. Your budget might look like this:
Rent ₦3,000
Groceries ₦21,000
Eating out ₦4,000
Bills ₦10,000
Health Insurance ₦1,500
Cooking Gas ₦6,000
Petrol ₦7,000
Clothing ₦10,000
Entertainment ₦4,000
Emergency fund/Savings ₦11,000
Pension ₦2,000
Credit card payments/debt ₦1,500
Travel fund ₦9,000
Other ₦0
TOTAL OUTGOING ₦90,000
As you can see once you've budgeted for your needs and wants, the other spending categories can be for anything else. For example if you want to pay off a loan in six months? Build it into your budget. Buy a generator? Set aside money for the down payment.
Supplementary Information
Emergency fund/savings: A general rule of thumb by most experts recommend an emergency fund of 3-6 months worth of expenses. So if you earn ₦30,000 then your emergency fund should be in the region of ₦90,000 to ₦180,000. Similarly if you earn ₦90,000 then your emergency fund should be in the region of ₦270,000 to ₦540,000. Sometimes even having emergency funds up to 12 months is advisable.
How much to spend on rent: Another popular rule of thumb is to spend a maximum of around 30% of your gross income on rent. Remember it's just a rule of thumb so if you live in high cost of living areas, for example, Lagos or Abuja you might struggle to keep to 30% alternatively in a lower cost of living area you shouldn't pass up a place because it's, say, 20% of your gross income.
Always adjust as circumstance requires.
Sometimes it is easy to think that in order to save one must put away large amounts. This is not strictly true. Choose a savings approach that matches your income vs expenditure. Don't be fearful of adjusting the guidelines; experiment if necessary after all it's your finances we're talking about.
For example if I was using the 50/30/20 rule, I would like to think that if my circumstances allowed it I could adjust things a little i.e. 45/35/20 or 55/25/20 or 50/25/25 etc. Similarly if I'm using the 70:30 rule I could adjust it to 60:40, 50:50 etc. depending on my circumstances. They aren't totally inflexible and the goals, budgeting & savings, are the overarching objectives. I might even device my own savings approach that works for me. For example if I earned ₦30,000 monthly, with all manner of headwinds in my periphery, I may decide that I'd save ₦1000 monthly no matter what. The goal remains unchanged - I need a cushion to weather unknown storms.
Note that savings alone is not a silver bullet and interest rates and inflation can have an impact as can large irregular expenses that can knock one off their savings routine. Unless you have millions and can live off your monthly interest, saving money on its own is not a great way to make money - more on this in a future blog. Nevertheless savings is a great way to build safety in your financial life, get your children through school, buy a house or a generator, retire, and get ready to invest money. It is an important way to reduce living paycheck to paycheck by ensuring we can deal with headwinds on the front foot and reduce shocks when they arise.
Just know you're not alone and the journey of a thousand miles begins with the first step; whatever your situation start small but just start because saving small but often really does add up.