On October 31 of every year, we observe “The World Savings Day” across the globe with the aim to inform people about the idea and importance of saving both from the perspectives of individual benefit and overall economic progress and maintenance of financial stability.
The World Savings Day was established in Milano, Italy in 1924 during the last day of the 1st International Savings Bank Congress (World Society of Savings Banks) where the Italian Professor Filippo Ravizza declared the day as the "International Saving Day".
While savings has been, is and will always be an important necessity more than spending given the uncertainty and unpredictability of future; the importance was felt and experienced first-hand this year probably more than ever before.
The pandemic dramatically altered our thought process and attitude towards it in the past couple of months. While dealing with the dismal reality of job-losses, stopping of work/businesses, paying off debts etc. a complete lock-down across the world accompanied with rapidly growing infections triggered the threat of economic recession worldwide.
The threat also came with warning of near-impossible short-term recovery unlike any other worldwide phenomena experienced the earlier decades. This was enough to turn some households into full-on “thrift mode” almost overnight.
So, now more than ever we all have to deal with the hard question of ‘how we build on this situation both at an individual and policy level’ to have a savings culture across the country (ies), as this can no longer be pushed under the carpet but has to be dealt with upfront.
Somewhere, it has also pushed all of us to take a hard look at our ‘material’ priorities over the real ones to be able to make right picks and choices as far as leading just a normal life is concerned!
Every individual has their own reasons, limitations and excuses for not saving. The truth is, no matter how much ever we earn there will never be enough money to save – savings unlike spending will never come naturally to us and will always remain a forced habit, hence, people tend to falter on it more often.
The tendency to save has to be a deep-rooted psychological need and desire to be financially stable. In order to cultivate a saving culture one must inculcate consistent saving habits into their life, and the earlier to do this, the better. Here are some of the common practices that an individual can adopt and acquire for succeeding over a period of time.
- Save (smaller amounts) every single day - To form a robust habit, the targeted behaviour must be repeated regularly, keeping the target and intention constant. Actively saving money every single day, even in smaller amounts is critical in forming a habit and over a period of time the insignificant daily amounts will pile up to a substantial amount.
- Make savings visible - In setting up a savings strategy, it's not only important to decide on the goals but also to categorize them by time horizon. The best way to go about this is to set a number of goals with timelines and then work towards each goal(s) either simultaneously or one by one. For instance, a young Rwandan in mid-20s may have a long-term goal of saving for buying a house or a short to medium-term goal of buying own vehicle, while an elderly person may already own a home and vehicle and now needs to save towards old age care and financial independence during retirement. The famous economist, Keynes (1936) suggested the following eight saving goals, which are relatively stable and thereby influence the propensity to consume over a long period of time: precaution needs, foresight, calculation, improvement, independence, enterprise, pride, and avarice.
- Save before you spend: One of the main reasons for people not being able to save is their uncontrollable spending habits. While spending is essential it needs more control than saving, so one needs to save first and try and spend with the remaining and not the other way round. Even the world’s biggest investor and one of the richest persons Warren Buffet strongly believes and follows – “Do not save what is left after spending, rather spend what is left after saving”.
- Consider all purchases as investments: One of the ways to be able spend and save justifiably is to consider all your purchases as investments; this will make the habit of choosing quality over quantity a reality and that in turn will help to maximise the benefits you derive from any item purchased and hence justifying the price for it. Even in frequently used items such as - clothes, electronics, furniture and appliances etc. it is important to choose the best, most durable option even if it costs a bit higher upfront as they will last longer and you will benefit more (this logic is mostly used while purchasing home and car but not otherwise).
- Start with a specific goal of building an emergency fund: Setting up and contributing to an emergency fund is one of the most important short-term saving goals one needs. An emergency fund is designed to pay for expenses that are out of the ordinary, that aren't part of one’s regular budget or are often not planned which might offset an otherwise well planned economic calendar.
It is important to inculcate the habit of saving from early on, so if today’s children are taught the importance of saving then they can easily carry on the habit and will have more sound financial discipline throughout their life.
This will also play a critical role in the development of personality traits such as perseverance, self-regulation and future orientation, which are likely to contribute to an individual’s ability to achieve and maintain financial well-being in adulthood.
Given the diversity of financial conditions, social settings, income, occupation and personal circumstances of families there is no one-size-fits-all savings solution.
While farmers have expenses throughout the year, they often bring in cash from selling crops at just one or two points in time. Beyond access to working capital, smallholder farmers and other agri-value chain actors lack financial products – savings, insurance, and payments – appropriately tailored to their needs in terms of design, accessibility, and affordability.
Digitally enabled savings and insurance schemes can give farmers the capital to weather a failed crop or medical emergency. Adequate savings could also enable farmers to make investments by helping them allocate and store money to buy inputs, such as fertilizer or pesticides or other technologies, at a later time.
There have been saving products that have been promoted either as financial, social or psychological incentives, e.g.
- An individual development account (IDA) is a type of savings account designed to help low-income individuals build assets and achieve financial stability and long-term self-sufficiency. These accounts are provided with some grants that match what the savers deposit in bank accounts (as long as the funds are used for specific purposes e.g. homeownership, education, or business development). IDAs, however, have had mixed success.
- Another way of promoting saving is through mutual or group savings. Members meet regularly and contribute funds that are then aggregated and presented to one member at a time. The meetings continue until everyone has been awarded the pooled sums at least once. This helps the members to leverage on the social power of groups to support savings.
- Prize-linked investment/saving products designed in a way to drive psychological incentives to increase saving. Investors purchase a savings product with no risk of losing the principal; in exchange for the chance to win large prizes allocated randomly among account holders.
Rwanda’s ability to finance a greater share of its development needs from domestic sources would give the country much-needed flexibility in the formulation and implementation of policies to address development challenges, direct resources into high priority areas and strengthen the state capacity.
The government adopted different initiatives to promote the culture of saving. In December 2018, the Rwandan government launched Ejo Heza, a NID-linked digital pension scheme intended to improve the welfare of, especially, workers in the informal sector. Ejo Heza accounts are mapped to each member’s unique national identification number and are portable across jobs, locations, and service providers.
The Government must work together with all financial and non-financial partners to communicate the incentives provided by the Government in the initial years of the scheme and the benefits of saving for retirement. Especially during the ongoing pandemic there is a need for the administrator to communicate to the existing members the importance of staying the course by keeping long-term investments plans.
Use of technology can help to expand financial access for the poor and mobilize savings. Rapid changes in technology present a big opportunity to improve the effectiveness of savings products. Mobile money and other forms of electronic transfer have expanded rapidly.
Mobile money changes the way customers’ access money, often in ways that reduce their financial or time costs. The expansion of mobile network coverage and mobile cash agents can sharply reduce the access barrier.
From the market perspective, financial institutions should start promoting products like recurring deposits, small saving scheme and monthly income plan to encourage savings.
The optimist in me wants to believe that at least a certain section of the society will learn from the on-going pandemic and will take this opportunity to build on the habits of saving, borrowing less and paying more. However, it is equally important to offer them a good range of financial saving options (products) to help them save for multiple purposes including investments so that they will be able to cope up with future emergencies in a better way.
The writer is an expert in financial sector development.