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The terms “Saving” and “Investing” are used frequently when we talk about personal financial management. More than one person has asked me whether there is a difference between the two terms. Yes there is and both are very important in your Financial Plan. You can look at it this way. Say for example you plan to eat potatoes next week. Saving will enable you to put aside money to be able to buy the potatoes to eat next week. Investing will show you how to grow potatoes. It will provide you with the skill, the seed and even the land to continuously grow potatoes in the longer term. That way your ability to eat potatoes is not reliant on your saving or working. Let’s evaluate this a bit further.

Many people wonder how to start saving. The concept is simple – spend less money than you earn and regularly put that money aside. You can simply open a savings account with your bank and start accumulating funds there. Do not wait to know all about the perfect savings vehicle or investment before you start saving. Just ensure it is a separate account from your normal day-to-day transactional account. When you get paid, put the money you intend to save in this account before you start spending. Do not wait for it to be there at the end of the month! There is no amount that is too small to save. The key is to just start. There are various reasons why you would save or using the same analogy we started with, there could be various forms of “potatoes” in your life. Firstly is for expenses that need to be met in the near future. For example you could start saving for school fees for the next term or you could save to cover your car insurance expenses. Secondly is for large purchases you may want to make e.g. saving to buy a phone, a car, put down deposit on a house etc. Thirdly you could save for emergencies. This could be money you can use in case of emergencies such as unexpected medical expenses, personal losses or loss of employment. As you can tell with all these reasons, money needs to be available. Car Insurance or emergencies cannot be paid if your money is tied up in a plot of land. Therefore you will need to keep money relatively safe and in a place where it can be accessed when you need it. Your savings may earn you some interest but you will not really be counting on returns to fund the expenses.

The last reason you would save is to build up enough funds to pursue various investments. Investing takes saving a step further. Investments enable you to build wealth in the longer term. Investments require more research and willingness to spend more time learning about the various investments. Your investments ultimately allow you to do two things. Firstly is to grow the value of your funds and secondly is to generate income. Rather than continuously saving to go buy potatoes from somebody else, investing allows you to acquire the land to keep growing the potatoes for as long as you want to eat potatoes. And as you take care of the land, buy the right seeds, put the right fertilizer the land keeps generating more and more potatoes for you. When you get tired of eating potatoes you can sell it and go acquire the land that produces tomatoes. Investing in a nutshell is what will get you to financial independence. The “land” that we are using in this analogy could be various things – it could literally be land as per our example. It could also be a business, shares, property etc. You can buy a share a Kes 10 and sell it later for Kes 20. You have made an extra Kes 10 by simply knowing which share to buy. You could start a business with Kes 100,000 and every year that business gives you Kes 50,000. You could buy a property that is not only appreciating in value but is giving you an income. The list is obviously not exhaustive and there are a lot of investments that you could pursue. At the end of the day money in this case is working for you because you are not just using money to meet future expenses, but making the money generate money. With Investments, you will eventually come to the point where the value of the investment or the income it is generating, exceeds what you contributed in cash. There is obviously an element of risk when you do invest money hence that is why investing is a long-term project. Remember the biggest financial risk is taking no risk at all.

In summary right now you may be working to earn an income. This income you will use to meet your current expenses and to save. Where you HAVE to be working towards is to use these savings (apart from those savings needed to meet short term expenses and emergencies) to accumulate ASSETS that will grow in value and/or generate an income that will fund your lifestyle. Whether you are working or not, you can cater for your lifestyle expenses. You will be able to eat potatoes irrespective of your job because your assets will produce the potatoes.

Waceke runs a program on personal financial management. Find her at waceke@centonomy.com| twitter @centonomy

I am currently employed but have wanted to be self- employed for a very long time. I have capital of Kes 100,000 and would like your assistance on what businesses I can venture into. When would be the best time to leave my job to purse this business?
Many people have asked the exact same thing as you have. The fact is no one can tell you what business to start. We are all different people, with different abilities, skills and different ways of evaluating things. Do not try to conform to what someone else has done. What worked for them may just not work for you. Remember any business works because there is demand for the product or service the business is offering. Evaluate what you think you can do and go out and test if there is demand for it. Look at other people who may be doing the same thing or something similar and challenge yourself as to what will be different about you. You do not have to leave your job to do this and it would not be advisable to do so. It may be something you can start experimenting with after working hours or on weekends.

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