Life contains quite a few activities that require continuous effort in the present, but do not bear fruit until the future. Most of them seem easy to start, but they are not so easy to continue.
One such example is exercising. You may say, "Ok! I will exercise regularly from now on." So you start, and keep it up for a few days. But then something else really important comes up, and you skip a day. Before you know it, your routine is broken and you stop… until your motivation tank gets filled again.
Another example, for a student, is studying on a daily basis. On the first day of the semester, you promise yourself that you will study daily, and not wait until the night before the exam. For a few days, you keep up with the teacher. Then, a day gets spent running errands, and, all of a sudden, it's time for the exam!
One of the most important of such activities - easy to start but difficult to continue - is saving.
Let us look at individual savings first. Many individuals believe that their income is so low that they can barely cover the basics, let alone saving. However, this claim is false as at every income level, one can save. Consider a low-income person who can afford to save only $20 a month. This amount will not make him a king, nor will it make him a poorer man. But what $20 can and will do is accumulate in time. Let's calculate it.
If you save $20 a month for twenty years, you're going to have $4,800, right? Wrong. Well, right, in one sense, if you do nothing but save your money, and $4,800 dollars is not bad after all. However, suppose you find a way to get some returns on this money. Among permissible ways, you can invest your money in a financial institution that avoids interest. Even though there are no guarantees (as opposed to investing in an institution that deals with interest), you still have a good chance of getting returns.
There are other options, too. Remember how your grandfather talked about how he missed buying that piece of land on the corner twenty years ago, and now it's highly valued? There will always be different investment opportunities - the problem is having the money at the right place and the right time.
According to his or her situation, every individual can determine a set monthly amount and earn returns. The results are more impressive with larger amounts, but let me give you an average scenario.
Let's assume you manage to get a 5% annual return on your savings - about the amount on a return from a money market fund. This amount is higher than the average bank's interest rates, but lower than the returns from a stock mutual fund. Your monthly investment of $20 will become $8,220.67 dollar in twenty years - almost double the $4,800 from just saving it. In thirty years, it will become $16,645.17.
If you save $50 a month, it will become $20,551.68 in twenty years, substantially more than the $12,000 you would have from just saving it. And the growth rate is even more amazing if you apply higher annual returns.
These numbers are difficult to believe, aren't they? Even though the time spans are long, the benefits are high, and if you agree to save for a few more years, you will see the growth of your savings at an even faster pace. Here is the story of someone who did not realize the "magic" of numbers:
Once, there was an arrogant ruler who wanted to reward a brilliant chess player by granting him whatever he wished. The wise chess player wanted to teach the ruler a lesson so he asked for the following: give me one wheat grain for the first square in the chess board, two for the second, four for the third, and whatever it adds up to after doubling it at every square until you complete all the 64 squares. The ruler was angry because he was asked for so little. He was about to send the chess player to jail. But he told his accountants to calculate whatever his request amounted to and send him away with his few bags. When the accountants came up with the result, they hesitantly informed the ruler that the whole year's product would not satisfy what was being asked for!
What is behind this amazing growth is compounding. In general, human beings tend to ignore the compounding effect. That's why a little savings every month does not make sense to many people. Also, since compounding takes some time to have a significant effect, many people are not patient enough to wait for its results.
Securing a sound financial position is very important. And learning to make good decisions early enables us to make better investments in the future as well. Best of all, when we invest wisely, we increase our ability to give to our favorite charities so that our values and our good deeds can outlive us, and we can earn the even higher rewards of the Hereafter, Insha'Allah.
Although my primary message here is the benefit of continuous savings for individuals, savings also help to build stronger and healthier nations when appropriately channeled to investment funds and charities. There is a chapter in Paul Samuelson's Nobel Prize winner introductory textbook in Economics where he simulates the environment of a president attempting to develop his "less developed" country. Samuelson makes fun of economists trained in the U.S. or other full-employment economies (where nearly all the production factors are employed) who did not learn the true essence of what they had been taught. He particularly emphasizes their misunderstanding of how critical it is to decrease consumption and increase savings in countries that are not fully employed. Whereas the president sees the ultimate need for doing so, these educated bureaucrats always argue to the contrary.
At a national level, savings are crucially important because they allow for investment which, in turn, creates jobs and enhances production. This leads to an increase in income, which permits additional savings and investments, and so on.
Even though the importance of saving is widely realized by most individuals and nations, it remains one of our biggest challenges because it requires continuous effort. Here, we might remember the saying of the Messenger of Allah (SAW) in which he emphasized the superiority of small but consistent efforts. Consistency is difficult, but it is surely worth it!
You can find extensive information on the Internet regarding these principles under the name of "Engineering Economy." The specific formula I refer to here is the "Sinking Fund Time Line." You can also find out how to save on insurance, transportation, grocery shopping, etc. Any bookstore will also carry books on this topic
