Easy money. Wishful and unmotivating, those words are akin to “instant gratification.” The human desire is to get something for nothing.
That’s the fantasy, but 99.9 percent of the time, not the real world. Wealth creation entails work. For Reginald Kadzutu, this is where his job begins, putting people in the mindset to make their dreams come true.
Kadzutu is chief investment officer of Amana Capital, a fund manager of unit trusts and pensions that provides wealth management. The company’s cornerstone program is the 7 Steps to Wealth. During an Africa Tweet Chat, Kadzutu talked about how to save for growth.
The appropriate time to begin saving is the sooner the better. Even if you can only start small, the compound interest will gain a lot over time.
“When it comes to saving, to be honest, this is a habit,” Kadzutu said. “We need to start teaching children as soon as they begin to get an allowance or as early as they understand the concept of money. Begin to teach children the habit of saving for their wants.
“instead of giving in to their every demand, teach them how to earn, how to increase it, then give them the satisfaction to spend it,” he said. “As long as you have income from whatever source, you should start saving.”
Don’t overthink your plan. Delays are costly.
“When it comes to saving, time is your best friend or worst enemy,” Kadzutu said. “It’s your best friend in that the longer the period of saving, the higher the compounding advantages. The shorter the period, the smaller the advantages. The best time to start is now.
“If you spend, that is not saving,” he said. “If you earn it — through doing chores or you are taught how to invest it to earn interest — then you can spend it. That’s being taught how to save. If you learn from parents, that’s teaching hand to mouth.”
People must learn not to spend beyond their means. As Kadzutu pointedly said, “You can only save what you have. Even if it’s not money, it can be time, but you have to have it and grow it so it increases.”
Income takes many forms: labor, investments, gifts and more. Kadzutu advocates setting aside 20 percent of income for savings.
“Land would be an investment, depending on the goal you want to achieve,” he said. “If land, you would look for a return. Factor in that it is not liquid to quickly sell.
“Land is a tool for preserving capital and not growing it,” Kadzutu said. “The myth of buying land to sell at a 300 profit percent is not sustainable. Land grows by 2 to 3 percent annually at most.”
A savings plan gives you a road map. You have a guide on how to reach your destination and what you need to do to hold yourself accountable along the way.
“There are many saving plans out there, and nowadays saving challenges,” Kadzutu said. “I don’t think a savings plan will help you save at all. Goals — life goals — will help you save.
“Nearly every goal you can set in life has a financial implication,” he said. “The first step to improve your savings is to set goals. Once you have set goals, you calculate how much will be needed to achieve your goal. After that, you save toward your goal.”
That sums up Kadzutu’s concept of goal-based saving.
“Saving is a habit that needs determination and consistency to cultivate and maintain,” he said. “What’s better to drive to those virtues than by aiming for and achieving your goals?”
Weighing how much money is enough to begin saving, one suggestion is to set aside 2 percent of gross income with every paycheck. That’s not much but generally painless. That gets you into a savings habit you can gradually build on.
“No. 1 is to live within your means,” Kadzutu said. “As you plan your finances, start from where you are and grow yourself to where you want to be. Don’t get broke trying to look or be rich.
“If we can get more people putting aside the little they have, we will fight old-age poverty and drag people out of debt one by one,” he said. “Saving is not putting money under a mattress or pillow. What are you putting that money aside for? Do you have an emergency fund? What happens if you lose your job today? Do you go into a crisis?”
Kadzutu explained more about the 7 Steps to Wealth.
“It’s a free online course, a life experience simulation on the basics of personal finances,” he said. “We took the time to educate anyone in any country about our seven simple steps to get control of your finances.
“The main goal of the experience is to get people thinking intentionally about their finances and take strides to live a financially stable and fulfilling life and get debt free,” Kadzutu said.
Investing starts with the basics in place.
“Every single cent you save must earn at least at a bare minimum interest, but you can’t invest what you haven’t saved,” Kadzutu said. “Saving is income not spent.”
In general, these are the reasons why people should save:
- To become financially independent.
- For unforeseen expenses.
- For emergencies.
- For security. If you lose your job, at least you’ll have something to push you as you look for another one.
- To have a good life.
Plan and follow through on saving money. It won’t save itself. If your company matches a percent of your income for retirement, contribute the minimum matching amount. Rule 1 of saving: Don’t pass up free money.
Kadzutu’s keys are goals, plans and patience.
“Having described goals, let’s go to plans,” he said. “The most basic of plans to have is a budget, a monthly budget — a written or typed-out budget that tracks your income and expenses.
“This budget has to be 50 percent needs, 30 percent wants and 20 percent savings,” Kadzutu said. “Review your budget at the end of every month. Have you stuck to your budget? If not, why? Correct it.”
The proper budget depends on people knowing the difference between their wants and needs.
“Needs are things you can’t do without such as rent, utilities, food and transport,” Kadzutu said. “Wants are whatever else you can live without, such as going out, movies, travel and so on. The 50-30-20 formula is not for you to suffer. You still have 30 percent to enjoy.”
Patience circles back to the faulty expectation for instant gratification.
“Wealth grows but not overnight,” Kadzutu said. “If you had bought Safaricom shares at 2.50 and held them for eight years, you would have more than 1,000 percent return. No shamba can give such a return.
“The key is patience,” he said. “No farmer plants seeds and keeps going to look at them every two hours.”
Harvest reaches fruition in a season, but that’s where the money is.
“Growing wealth takes time and sticking to your plans,” Kadzutu said. “Achieving your goals patiently is the trick. Get the basics right. Do you have a loan? That should be Goal 1. Pay it off as fast as possible because it is a hole in your finances. Do you have an emergency fund for a rainy day?
“Diversify your sources of income,” he said. “In life, you can only cut expenses to a certain level. How do you earn extra money apart from employment and business?”
Investing and saving are interrelated for wealth creation.
“Saving is capital accumulation,” Kadzutu said. “As you accumulate that capital, you allocate it to different goals. Investing is one of the goals you should have. Saving is the foundation step to be able to make investments.”
These factors led Kadzutu to create his online course.
“We realized there is a huge need for financial education,” he said. “Most companies in this industry would rather push products and offer a return, but that will not liberate or help people achieve their goals. The best form of investment one can take is education — and ours is free.”