Why Savings are Important but May Not be Enough

To start a business or any economic endeavor, you need capital. Some entrepreneurs start with little capital, others with millions of pesos. Ricky Reyes started with his savings of P1,000. Jovel Cipriano started with over P10,000. The need for capital varies, but the fact remains that capital is needed.

There are a number of ways to raise capital

One is winning a lottery, sweepstakes or something similar. The probability of a lucky win is low and successful Pinoy Entrepreneurs would tell you that success is mostly about hard work. Also, too much money pouring in over a short span of time may not be supported by the attitudes necessary to grow that money or, at the very least, maintain it.

Borrowing is another source of capital

Successful multi-billion businesses actually borrow money to create more wealth. There’s a world of difference, however, with that and personal borrowing. Interest expense in business borrowings is deducted from income in computing tax. The borrowed amount is also part of the income-generating capacity of business. You borrow to earn more, which is not the same when you borrow to pay for personal contingencies like hospitalization.

High-Paying Job

Another way to raise capital is through a high-paying job. A stable job, while always good, may not be enough. A stable salary would vanish if the company closes or if the worker is fired. You could work abroad where the exchange rate means you get premium in pesos, but you won’t be working abroad forever. No work, no pay, and so you’re only as good as your next paycheck. Your money should be working for you, not you chasing the next paycheck.

Savings

Saving money is easier said than done. NSO figures (2003) show that the lowest 20% of the population have no savings and, worse, their expenditure is actually more than their income. The next 10% of the population is breakeven, with expenditures equivalent to incomes. If we look at the next 40% (comprising the 40-70 decile), which is arguably the middle class, we’ll see that the average saving is merely 8.45% of the annual income.

Compare this to the top 30%, with an average saving rate of 22.4%. Even this saving rate is low if we consider the statement of Mr. John Gokongwei, Jr., one of the most successful Pinoy Entrepreneurs: “If I have ten pesos, I spend only one peso and save the nine pesos. That was how I ploughed back my profits. I spend very little and save a lot.”

Saving is about discipline. It entails awareness of income and expenses. It’s about being money-smart and paying yourself first. There’s a need to stick to the budget and not spend more than what is disposable. The discipline in savings is part of the discipline in doing business.

Cap on Spending

Spending is more natural to us than saving, so it seems. You spend, often in excess, without realizing it. On the other hand, you have to be conscious about saving, but once it becomes a habit, it comes naturally. Let’s interject a passage to stress the point: “We sow our thoughts, and we reap our actions; we sow our actions, and we reap our habits; we sow our habits, and we reap our characters; we sow our characters, and we reap our destiny.” If saving becomes a habit, then it becomes natural as breathing.

Economic Independence

Saving is an integral part of attaining economic independence or, in short, getting rich. You could get rich by earning more, then saving a big chunk of it. You could also get rich by saving more, even if the earning remains the same. You could have a combination, but saving is always an integral part of it.

Emergency Fund

When you save, you provide a cushion for emergencies and other contingent expenses. You don’t have to borrow and incur additional expenses by way of interest. You have ready capital for expansion. More importantly, because saving is opposite to expenditure, being conscious about saving means you’re also conscious about controlling expenses, including runaway credit card debts.

Savings May Not be Enough

But saving, by itself, may not be enough, unless, of course, the interest earning of the savings is enough to cover the daily expenses. You would need millions for that. To illustrate, to cover an annual expenditure of P1 Million, you need a little more than P133 Million for regular savings (at .75%) or P15 Million for time deposit (at 6.5%). Chances are, you don’t have that amount and, besides, we are talking about current expenses, not your retirement fund.

Business and Investment

Business and investment enable the saved capital to work for you. Just a caveat, though. Hurrying to get rich is also the cause why so many are duped by the get-rich quick schemes like pyramiding or the Ponzi schemes. You have the money and you want to get it back as soon as possible and with the highest level of income possible.

With business and investment, your savings are earning more money even if you’re somewhere else, also making money. This is why the rich is getting richer, an irony that is sometimes unfairly taken against the rich. It’s not a sin to maximize resources to produce more. The entrepreneur “shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.” (Peter Drucker, Innovation and Entrepreneurship, quoting J.B. Say).

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