Savings Meaning: (Source: http://www.deposits.org/dictionary/term/savings/)
In deposit terminology, the term Savings refers to money set aside for the purpose of future use. Savings generally represent only one part of an individual’s assets and, unlike investments, they usually have a minimal exposure to risk.
Based on the 2012 Family Income and Expenditure Survey of NSO:
- The poor earns 69,000Php annual income and their expenses are 73,000Php. They don’t have savings and even incur 4,000Php debt.
- The rich earns 715,000Php annual income but their expenses are also high at 503,000Php. Savings is 213,000Php.
How could we change the fact that poor people have no saving? We should try to understand the difference of how poor people save and how rich people save.
Poor people’s way of saving: (Poverty Formula)
Income – Expenses = Saving
What is wrong with this formula? If Expenses is greater than income, we will not have money for savings and worse is we may even incur debt.
Rich people’s way of saving: (Prosperity Formula)
- Basic: Income – Love Offering – Savings = Expenses
- Advance: Income – Love Offering – Investing = Expenses
- With Debt: Income – Love Offering – Savings – Investing – Debt Payment = Expenses
Note: Love Offering is similar to tithes but this is dependent on what you are willing to give. If you look at the Bible, it is 10% of income.
Most financial advisors will advise not to start investing until all debt has been paid up but there’s another school of thought that if you wait until all your debt has been paid up you will feel discouraged that you have not fully paid your debt and you have no savings or investments.
So, this other school of thought is recommending dividing 20% of your income across your deb, savings and investments. At the end of the day, it is up to you.
Whatever formula you choose, you will be able to save and even invest and you will be forced to either live within your means or expand your means by finding additional source of income. It is important to have discipline and just keep on saving.
Look out for future blogs where I will share different ways of saving and how we will use our savings to grow via different investment vehicles.