One of the most practical questions is deciding in a given situation: should I put my money in savings or invest it? Here are scenarios and guidelines:
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Build an Emergency Fund – Save: As a rule of thumb, before diving heavily into investments, accumulate an emergency fund of at least 3-6 months of living expenses in a safe, liquid savings vehicle (bank account, money market fund, etc.). This is money you don’t invest because you might need it on short notice and can’t afford to have it tied up or at risk. For example, if your monthly expenses are KSh 40,000, aim for an emergency fund of KSh 120,000–240,000. Until that is met, prioritize saving.
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Short-Term Goals (<= 2 years) – Save: If you have money earmarked for a specific purchase or payment in the near future (few months up to a couple years), saving is usually wiser. Say you plan to pay next year’s school fees, or you’re saving for a wedding or a laptop purchase in six months – that money should not be in stocks or long-term investments. The risk of a downturn in the interim is not worth it, because you have a fixed near-term need. Keep such funds in a high-yield savings account or a short-term fixed deposit or a very stable fund. For instance, if you’re saving KSh 100k for a course next year, put it in a 6 or 12-month fixed deposit or T-bill where you’ll earn a bit of interest but it’s essentially safe and available when needed.
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Medium to Long-Term Goals (>= 3 years) – Invest (with some caution for medium term): For goals that are a few years away or more (buying a house in 5 years, children’s education in 10 years, retirement in 25 years, etc.), investing is appropriate because you need growth. Over a 5+ year period, the likelihood of a well-chosen investment outperforming a savings account is high. For a medium horizon (3-5 years), you might not go 100% into high-volatility assets, but perhaps a mix. For example, if you need to pay for a child’s college in 4 years, you might invest in a conservative balanced fund or bonds, rather than purely stocks, to protect the timeline somewhat. If it’s 10+ years away, you can be more aggressive, since you have time to recover from any down cycles.
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Extra Windfalls or Surplus – Invest: If you have excess money beyond your emergency and short-term needs – say a bonus, or monthly surplus income – that’s prime for investing. After keeping some aside for contingencies, put the surplus to work via investments. For instance, you have a stable job and have saved 6 months expenses; now each month you find you have KSh 10k spare after all bills. Rather than just accumulate it in a savings account earning minimal interest, you could set up an auto-transfer to an investment (maybe a mutual fund or Sacco or brokerage) each month – effectively investing it. Over years, this will grow far more than leaving it in bank.
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If You Anticipate a Major Purchase or Need Soon – Save: Timing matters. Even if you originally invested for long term, if that long term is approaching, you might shift back to saving mode to protect the money. For example, suppose you invested for 8 years to accumulate a down payment for a house. Now year 8 is here and you intend to use the money in a few months to buy the house – it’s wise to move that money out of volatile investments into cash or a secure account. You wouldn’t want a sudden market dip to slash your fund right when you need to use it. Essentially, as goals come due, convert investments to savings to lock in gains and ensure availability.
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Stable vs. Unstable Income: If your income is irregular or uncertain, you may want to lean on more liquid savings to buffer tough times. For example, a freelancer or farmer with seasonal income might keep a larger savings buffer. Once that buffer is sufficient, they can invest additional funds. Someone with a very secure salary and low risk of job loss could possibly invest more aggressively knowing their monthly cash flow covers needs (though they still need that emergency fund since no job is 100% secure, and emergencies can be non-job-related like medical issues).
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Personal Risk Comfort & Knowledge: If you find you are not yet knowledgeable or emotionally ready to invest, initially focus on saving while you educate yourself. It’s better to hold money safely than to jump into an investment you don’t fully grasp and potentially lose money due to inexperience. Over time, as you learn, you can gradually venture into investing. Many start with a simple unit trust (professionally managed) as a toe in the water, then later buy individual stocks or property once comfortable.
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Inflationary Periods: When inflation is high, the cost of leaving too much money in cash becomes apparent (purchasing power falls). In such times, investing in assets that traditionally hedge inflation (real estate, commodities, inflation-indexed bonds, etc.) can preserve value. For instance, if inflation in Kenya spiked to 10% and your bank still gives 4%, keeping large sums in savings is losing ground; investing in something like a property or even a high-dividend stock (if that stock’s business can raise prices with inflation, it passes inflation on) might be wise. Conversely, in a deflationary or very low inflation environment, the gap is smaller, but generally Kenya has moderate inflation, so investing to beat it is usually warranted for long-term funds.
Rule of Thumb: One common rule suggests: have your emergency fund and next couple years’ worth of goals in savings, and invest the rest.
Another guideline sometimes used is the “100 minus age” rule for stocks: e.g., if you’re 30, put 70% in stocks (100-30) and 30% in safer assets, adjusting as you age. While these are generic, the underlying concept is: the younger and longer horizon you have, the more you tilt to investing; the older or closer to a goal, the more you tilt to saving/preservation.
In practice, consider a Kenyan family: they keep KSh 200k in a money market fund as emergency (savings), they save monthly for annual school fees in a bank account (savings), and they invest contributions in a Sacco and some in a stock fund for long-term (investing). If they plan to buy a car in 2 years, they might use a 2-year Sacco deposit or fixed deposit (more of a saving approach because of short term), whereas for retirement 20 years away, they might invest in a diversified pension fund or property (investing approach).
To conclude this part: Save for safety and short-term needs; invest for growth and long-term goals. It’s not either/or, but a question of proportion and timing. The ultimate objective is to have a solid financial cushion and to make your surplus funds grow. By doing both appropriately, you’ll be prepared for emergencies and also build wealth over time.
Conclusion
Saving and investing are complementary strategies in your financial toolkit. It’s not about which is better universally, but which is appropriate when. An effective financial plan will have a bit of both: a layer of savings to fall back on, and a layer of investments to propel you forward.
Think of saving as your shield – it protects you in crises and covers known short-term expenses. Investing is your spear – it drives you toward future prosperity and big goals. You wouldn’t want to be without either in your financial journey. If you only save, you might be safe but never significantly grow your wealth (indeed, inflation will chip away at it). If you only invest without any savings buffer, you could be forced to liquidate investments at bad times or find yourself in trouble if a sudden need arises.
By distinguishing when to deploy each, you become a savvy financial manager of your own money. For example, you might say: “I have set aside my 6-month emergency fund in a savings account and a Sacco; now I will invest all additional savings into my retirement fund and my children’s education fund.” That shows clarity in action – safety net in place, now growth mode for the rest.
Revisiting the key differences: saving is certain (but limited reward), investing is uncertain (but higher reward potential). A wise person once said, “Do not save what is left after spending; spend what is left after saving.” This emphasizes paying yourself (saving) first. We can extend it: “…and invest what is left after securing your savings.” That means once you’ve set aside your necessary savings, put remaining money to work through investments.
One should also periodically review the balance between their savings and investments as life circumstances change. Early in one’s career, you might be heavy on investing (long horizon, tolerance for risk). As you approach retirement, you gradually shift to more savings/preserved capital to protect what you’ve accumulated and ensure liquidity for withdrawals. Or if an anticipated expense pops up on the radar (like deciding to pursue further education next year), you’d temporarily stockpile savings for that purpose.
In Kenya, the concept of “asset diversification” often naturally happens: people keep some cash at home or M-Pesa (savings), they buy some plot of land (investment), they join a Sacco (which has elements of both saving and investing), etc. The idea is ingrained, even if not formally expressed. Formalizing it in your financial plan only strengthens your position.
In conclusion, master both arts: be a diligent saver and a smart investor. Use saving to stabilize your finances and investing to accelerate them. By doing so, you ensure that you are both secure in the present and prepared for the future. With this understanding, we can now turn to managing the risks that come with life and financial ventures, ensuring that even our best-laid saving and investing plans are resilient against unforeseen events.