Start planning for your financial future today

Former International Monetary Fund (IMF) managing director Christine Lagarde used to say: “It is best to fix the roof when the sun is still shining.” It means people should build financial buffers in times of economic stability to prepare for tough times.

The thing that struck me the most about her reasoning is that she knew from her decades of experience working in economic circles that the economy moves in cycles. The good times, no matter how much one would like them to last, always pass and are replaced by times of economic downturns.

Right now, the global economy is in a state of stagflation—a period of high inflation and subdued economic growth. The economic environment has not spared individuals. The cost of living is rising, but salaries have not kept pace with the rising prices.

To add to the misery, interest rates on consumer loans have gone up following the government’s decision to raise the policy rate as an instrument to tame inflation and stabilise the economy. Unfortunately, the interests on consumer loans have remained significantly low.

On average, annual inflation is hovering at around 28.4 percent. Meanwhile, banks and other formal financial institutions are offering interest rates of about 3.7 percent average, according to figures obtained from commercial banks and the Reserve Bank of Malawi.

This translates to a spread of 24.7 percent. In effect, this means that the money placed in an ordinary savings account loses its value to inflation faster than it gains in savings interest. The developments have discouraged some sections of the public from investing in ordinary savings accounts.

On face value, it does not make sense to save when the money will have lost value when you need it. But it is important to realise that it is better to save a little and gain a little value through interest on savings than not save at all.

After all, four percent compounded over an extended period, of say five or 20 years, will be better than having nothing at all. Especially for people who are heading towards retirement.

People in salaried employment sometimes become too comfortable with the promise of a pension at retirement. Historically, salaried employees in Malawi wait for their pensions to build their retirement home or invest in a business venture.

It is a strategy that works, to a certain extent but the problem is it leaves the people with little or nothing to live on. It is a problem for someone who was used to having a steady source of income during their working days to adjust to a lean period when they retire.

No matter how good a pension scheme is, chances are high that the money a person will get from their pension will be a fraction of what they were earning during their employment.

It is tougher to manage with a lower income at a time when the person’s health might have deteriorated due to advanced age.

So, people should be encouraged to diversify their investment portfolios and increase their savings to prepare for this lean period. The good news is a person does not necessarily have to start big.

A salaried individual can dedicate about 10 percent of their net income to a savings account that offers a reasonable return on investment. A good rule of thumb is to target a saving portfolio that offers interest rates higher than the inflation rate.

Commit to the goal. Keep putting money in that account and let the compound benefit you. If you already have a sizeable amount saved in an ordinary account somewhere, now might be the best time to invest that money in the stock market.

The Malawi Stock Exchange is one of the best-performing stock markets this year. It might be prudent to capitalise on the strong performance and grow your investment in the short term instead of letting it lose value in a savings account.

For those who are unemployed, secure a loan from family and friends and establish a small farm where you can earn some money. Don’t wait to start big. Start growing your investments now before it is too late.