Leaders look forward as well as behind. They don't forget the past they come from but they keep sense of history thus work to develop the future dreams.

 

 

LESSON ONE.

The Youth Rescue Outreach

(TYRO)

PUBLIC DIALOGUE

Topic : Savings, Credit & Wealth Creation

03 October 2007

By

Henry Bainomugisha

Micro Finance Unit

Uganda Cooperative Alliance Ltd.

 

Savings, Credit, & Wealth Creation

Introduction

This paper will give highlights on the following;

• Importance of savings
• Ways to save
• Careful selection of a financial services organization
• Tips on Developing a good savings culture
• Setting personal financial goals
• Developing your own personal financial plan
• Using credit wisely
• Means of wealth creation

SAVINGS

Definition of Savings

Savings is money put aside by an individual or household for use in the future.

Savings

Savings is money put aside by an individual or household for use in the future.

Importance of Savings

• Savings are important to the individual saver in the following ways;.
• Accumulation of start up capital
• Income in form of savings interest
• Substitute for tangible collateral property
• Improves sense of ownership in member owned financial institutions
• Smoothens income during the time of shortage and personal /family emergencies
• Savings habits encourage the development of long term planning ability and gaining control over your funds

Ways to Save

Managing money well begins with hanging on to what you have. This means avoiding unnecessary expenditure and then finding a safe place to store whatever money is left over.

You can choose to save through formal, semi-formal or informal ways

Informal savings

• Saving cash at home
• Saving in-kind (gold, livestock or land)

Semi-Formal savings

• ROSCAs
• Village banks
• VS&fAs

Formal savings

• Banks
• Credit Institutions
• MDIs
• SACCOs/Credit unions

Important Factors for Careful Selection of a Financial Services Organization

When deciding where to save, you should consider the following:

• Safety Liquidity
• Deposit requirements for the savings account
• Terms of use
• Cost
• Access/Ease of use
• Interest

Tips on Developing a Savings Culture

Decisions to save or consume depend very much on one's level of income, access to loans, access to appropriate savings products, and personal discipline. Nevertheless, there are a number of tips that you can use to guide decisions about savings and consumption.

• Save as much as you can as soon as you can. The more you save, the better off you'll be.
• Save as you earn.
• Try to save 10% of your income even if you don't have a specific purchase or investment for which you are saving.
• Pay yourself first—put 10% of your earnings aside for savings before you do anything else.  If you can't afford 10% right away, start with less, but save something.
• Calculate how your money can grow over time if you save regularly in an account that earns interest.
• Don't carry a lot of cash—avoid temptation to spend it!
• Spend carefully. If you purchase big items, consider how much you could resell them for. Look for opportunities to save money by bulk buying of non-perishables.
• Pay off your debts. Some people recommend paying down your debt before you start to save: others recommend saving even while paying down debt because it is important to begin building assets as soon as possible. This choice will depend on individual priorities, situation, and means. Total household debt should not exceed 36% of household income.
• Keep three to six months of living expenses in an emergency fund at all times. It can be used in case of job loss, unexpected illness, and to meet other emergency needs. An emergency fund will reduce your anxiety.
• Keep emergency funds in a separate account. Open two savings accounts—one for emergencies that is easy to access and doesn't have any penalties for withdrawal, and one for savings for other goals that is harder to access (and therefore less tempting to withdraw the money). Keeping some savings "out of reach" is important.
• Find savings products that match your savings goals
• Good savings behavior requires discipline; discipline is learned through practice.

Setting Financial Goals

Goals can vary—from meeting basic needs, to getting out of debt, to educating children, to buying a house. Some are short-term to be accomplished quickly, others are long-term.

Once you decide on your priority goals, figure out the cost of each and set a time frame for achieving it.

Next, estimate how much you must allocate to savings every month to achieve each goal. If this amount is more than you think you can afford, make adjustments—extend the time you need to save the desired amount, reduce the cost, or change the goal.

Example of financial goals

• House Repairs
• School Fees
• Son's Operation.

CREDIT

Definitions

Loan:   Something lent for the borrower's temporary use. Commonly, a loan refers to a sum of money that a lender gives to a borrower for a certain period of time. The borrower makes a commitment to repay the money with interest.

For the borrower, the loan is a liability (a sum that is owed). This debt must be repaid regardless of income or cash How.

Credit: The ability to borrow, or the sum available for borrowing.

Banks and other financial institutions will approve credit to customers who have a good record of repaying their loans an lime. Purchasing "on credit" means getting the item you want without fully paying for it at the time of purchase. The buyer makes a commitment to pay for the item in installments or on a certain date in the future.

Default: Failure to pay back a loan.

Components of Credit

If you borrow money from a bank or other formal lender, you will hear the following terms associated with your loan. It will be important to understand what each means for your specific loan.

Loan size. The amount you borrow.

Loan term. Period of time you have to use the loan money and repay it.

Interest rate. Percentage of the total loan amount charged to the borrower for the use of money borrowed. 
Interest is usually charged on a monthly basis.

Fees. Administrative charges in addition to interest which is usually paid once, at the time the borrower takes the loan.

Grace period. Period after receiving a loan and before the first payment is due.

Repayment schedule. The frequency of loan payments (e.g., weekly, biweekly, monthly).

Why Borrow?

We need to borrow money for many reasons. Mostly, we borrow to:

1. invest;
2. respond to an unexpected emergency; or
3. consume (purchase an item for which we do not have enough money at the time of purchase).

A loan provides you with a lump sum of money that might be difficult to obtain otherwise. It enables you to take advantage of business opportunities, respond to emergencies, make home repairs or purchase something you need.

But borrowing money can be expensive and carries obligations to repay on time. For these reasons, taking a loan is not the same as using your own money that you may have through wages, business profits or savings. The chart below outlines the advantages and disadvantages of taking a loan. 

 

Risks of Borrowing

For every borrower, debt is a risk. If you can't repay your loan, there will be consequences!   Even with careful planning, you may have problems making loan payments. Many unplanned events can turn this risk into reality, such as the following:

• When your income is interrupted due to illness or necessary absence
• When the investment of the loan results in a loss
• When your household and business expenses are greater than your income
• When unexpected events create an urgent demand for cash (e.g. to pay doctors" expenses, funeral costs, etc.)

Situations like these are common among the poor. Yet. loans must be repaid, regardless. If you face difficulties making your loan payments, what are your options?

To get the money for loan payments, you might need to reduce your spending or sell something of value. You can ask your friends and relatives to help you, but there is a risk that you will eventually "use up" their goodwill towards you.

If you fail to pay altogether, or default on your loan, what are the consequences? You may lose access to sources of credit in the future. You may strain relationships with other members of your credit group; you might suffer humiliation in the community and lose the goodwill of your friends and family. Defaulting on a loan may damage your confidence and self-esteem.

Using Credit Wisely

The risks that come with taking a loan should make you think carefully about when and how much to borrow. Loans can open new doors, but you need to know when taking a loan is a wise decision. Good uses of loan capital include the following:

• Purchasing inputs in bulk at a lower price that will increase profits
• Financing productive assets such as machines that help you improve productivity, i.e.. a water pump that enables an additional harvest, or food-processing equipment that adds value to a crop
• Purchasing an asset that makes a new business possible, such as a cell phone or a refrigerator

Simply put, borrowing is good when it helps you gain financially and bad when it becomes a financial burden.

The Costs of Borrowing

The main cost associated with a loan is the interest charged for the use of the money. This is usually calculated as a percentage of the total loan amount, and you typically pay it in monthly installments as part of your loan payment. In addition, many lenders also charge administrative fees which you usually pay once, when you take the loan. Interest and fees are charges that you pay directly to the lender. These "direct costs" are usually cash payments.

However, there are other expenses associated with borrowing that may not be so obvious. Sometimes applying for and taking a loan forces you to spend money for transportation to attend meetings or go to the bank to fill out application forms. These activities may take you away from your business, forcing you to close it or hire someone to "mind the store" while you are away. Although these additional "indirect costs" may not be part of the cash loan payment, they are real and should be considered when choosing a lender.

Choosing a Lender

The cost of a loan will vary depending on the type of loan you seek and the lender's policies regarding interest rates, fees, savings requirements, and collateral. Before you borrow, compare the costs of the loan you want among several lenders.

Choosing a lender is not only about costs. You might also want to consider the following:

• Location (Is the lender close to your home or business?)
• Product offerings (Does the financial institution offer other types of loans or savings services that interest you?)
• Customer service (Do you feel comfortable there? Is the staff friendly and helpful?)

How Much Debt Can You Afford?

Too much debt can cause serious problems. The term "over-indebtedness" refers to household debt that is too high relative to household income. How do you figure out how much debt is too much? Unfortunately, there is no rule of thumb about a safe debt-to-income ratio, although 20 to 30 percent of household income is widely used. Should your household always avoid carrying more than one loan at a time? Not necessarily, especially if you face a crisis and need cash urgently.

Before taking on a loan, you should consider both the costs and risks of borrowing. Answer the following questions based on your own circumstances:

1. What percentage of my household and/or business budget can I afford to make available for debt repayment? Will I have enough left over to adequately cover other household expenses?
2. Can my guarantors afford to repay my loan? How will they feel towards me if they have to do so?
3. What are the consequences if I cannot repay my loan? What is the value of the collateral (for example, a motorbike, house, etc.) I have pledged?

Controlling Debt

As a borrower, the debt trap can sneak up on you. Because it occurs slowly, you may not see it coming. Suddenly you owe more than you can afford to pay and the way out is nowhere in sight!

The persistence of debt is one factor that keeps poor people in poverty. For most of us. living with debt has always been and continues to be a reality. Because your need for credit typically does not go away, you are likely to renew existing loans. In fact, given ever-changing circumstances, at some point you may need more than one loan at a time. This can happen when you are faced with an unexpected crisis and need cash urgently.

Whether managing existing debt, or deciding if you can afford to take a second loan, make sure your debt obligations will not control your life—that you will still be able to pay for your basic needs and daily expenses. Two simple rules will help you control your debt:

1. Don't borrow more than you can afford to repay.
2. Save money regularly for emergencies so you do not always have to borrow.

The Bottom Line

Debt is not our enemy.  Bad credit habits are.   Use credit well and use it wisely.

WEALTH CREATION

Definitions

In economics, wealth refers to the value of assets owned minus the value of liabilities owed at a point in lime. 'Wealth' refers to some accumulation of resources, whether abundant or not.

The capitalist notion of wealth

Industrialization emphasized the role of technology. Many jobs were automated. Machines replaced some workers while other workers became more specialized. Labour specialization became critical to economic success. However, physical capital, as it came to be known, consisting of both the natural capital (raw materials from nature) and the infrastructural capital (facilitating technology), became the focus of the analysis of wealth.

Adam Smith saw wealth creation as the combination of materials, labour, land, and technology in such a way as to capture a profit (excess above the cost of production).

Wealth as time

According to Robert Kiyosaki, author of Rich Dad, Poor Dad, wealth is nothing more than a measurement of time. It is how long you can continue to live your lifestyle without any adjustments when you cease working. That for instance if you have a burn rate of $2,000 a month in bills and expenses and $4.000 in the bank and you have no other forms of income, then you have a wealth measurement of 2 months. If however you are simply able to increase other forms of income, those which are not the result of trading time for money, to a point where they exceed your monthly burn rate, then you will effectively reach infinite wealth.

Wealth redefined individualistically

Wealth could be defined as the resources necessary to sustain a person's specific "Standard of Individual Living" (SOIL). It could be argued that if a person has resources more than necessary to sustain them in life they would be called rich.

The Creation Of Wealth

• Wealth is created through several means.
• Natural resources can be harvested and sold to those who want them.
• Material can be changed into something more valuable through proper application of knowledge, skill, labor and equipment.
• Better production methods also create additional wealth by allowing faster creation of wealth. (The profit creates wealth for the owners of the organization)
• Investing in real estate, stocks, businesses and more

Conclusion

Savings and credit opportunities can greatly improve the youths' lot. However, while undertaking the various activities to generate income for savings, investment and wealth creation the youth should be mindful of the negative impact of their production activities on the environment to ensure sustainable creation of wealth.

lesson two

4.0. LEADERS ARE WELL AWARE

 

4.1. Leaders look forward as well as behind. They don't forget the past they have come from.  They keep a sense of history.

A family, teachers and community have a direct bearing on ones life. Watch people and practice the qualities you want to admire. When even in wrong, admit it. This is not a sign of weakness. Encourage team work. Be number one in the team. Deal with issues but not personalities.