EDITOR’S NOTE: This article is part of our Money254 Partner Series produced in partnership with Absa Bank Kenya to celebrate the launch of their new digital savings account. For more on Absa’s new digital savings account, read here.
(UPDATE: The Absa Digital Savings Account is offering a 10% interest rate between effective December 12, 2023 and valid until March 2024, you can use the Absa Digital Savings Calculator here.)
As the year draws to a close, it is time to reflect on the lessons we have extracted from navigating the economic curveballs 2023 threw at us. There have been many of them, from the rising living costs, fear of recession, the weakening Kenyan shilling, as well as downsizing and shut down from both small and large businesses.
All these events have undoubtedly affected our finances directly or indirectly.
Amidst these trials, Kenyans have demonstrated remarkable adaptability and resourcefulness. The lessons learned in 2023 extend beyond mere survival; they delve into the benefits of financial management and long-term planning.
So, what money lessons have we learnt this year that we need to carry into 2024 to prosper?
An emergency fund is the money you set aside to provide a buffer in case of a crisis—a loss of income, delayed salary, a medical or repair bill, a family emergency, or other unexpected expenses.
An emergency fund provides a safety net; without it, you might be forced to borrow or dig into your goal savings account. As a rule of thumb, employed professionals should save at least three to six months' worth of expenses.
But your emergency funds can only be as valuable as where you keep them. If you stash it in the wrong place, then the efforts to grow them might be futile.
If an emergency fund is too accessible, say it is kept in a current account, on mobile money, or cash, then the temptation to dip your hand into your lifeline can be overwhelming. At the same time, if the emergency fund is kept in a vehicle that is too illiquid, then it may beat the purpose of the investment in the first place.
Illiquid investment or savings vehicles include those that require a long process of getting back your money.
The long process may involve you forfeiting interest earned, and sometimes paying fines or liquidating at a loss - for example, if your emergency fund is invested in a piece of land that would take months to sell, it may not come in handy when an emergency requires you to raise cash in a matter of days or weeks.
The Absa Digital Savings Account offers a balance between accessibility, illiquidity, and returns. It operates separately from a current account but also offers regular statements to track your progress.
It offers a competitive 10% interest rate with daily accrual and monthly compounding, motivating you to grow your savings. It also offers a penalty-free withdrawal in the event of an emergency.
You've probably heard about the recent surge in inflation from the news. Perhaps you've also noticed that your expenses, like groceries, electricity, rent, and other bills, are increasing. Rising costs can be stressful, but inflation impacts not just your daily spending but also your savings. That's why where you choose to put your money matters.
As prices go up, the purchasing power of your savings decreases. When inflation surges, each shilling in your savings account is worth less than it was when you put it there.
For example, let's say you had set aside Ksh50,000 in January to buy your parents a washing machine in December. After 12 months, you may find that the cost of the machine has risen to Ksh54,000. This is inflation in action. It has reduced your purchasing power, and now you need an extra Ksh4k to achieve your goal.
To avoid this situation, it's essential to keep your money in a savings account with interest rates higher than the inflation rates. As of October 2023, the annual average inflation rate in Kenya is 8.1%, according to CBK data. For short-term goals (like buying a washing machine), not many savings accounts offer interest rates above the inflation rate.
However, one account that does is the Absa Digital Savings account, which offers a 10% interest rate, one of the highest among commercial banks in the Kenyan market. Moreover, this account has no fees ensuring that your returns are maximised.
To put it into perspective, if you have an emergency fund of Ksh250,000 and you kept it in the Absa Digital Savings Account for a year, you would earn about Ksh23,000 in interest, without having to put in any extra money. This effectively preserves the value of your money.
If you live paycheck to paycheck, you will find it hard to build wealth and save for the future. This is often because of a rookie budgeting mistake; you save what’s left after spending. But the issue with prioritising spending over saving is that it limits your opportunities for savings.
This is where the “pay yourself first” method comes in.
This is a foolproof method of prioritising savings by setting aside money for savings before paying bills or considering other expenses and obligations. When you “pay yourself first,” you budget and spend based on what remains after saving rather than saving whatever is left after spending.
Paying yourself first lets you plan for the future and use your savings to achieve long-term goals.
By paying yourself first, you establish a saving structure that, if consistently followed, becomes a regular part of your financial habits. However, sticking to this approach can be challenging, especially when starting.
To overcome this challenge, consider using a savings account that allows you to automate your savings. Accounts like the Absa Digital Savings Account enable you to set up regular transfers after every paycheck or monthly using standing orders.
Additionally, this account offers features that help you track your savings, ensuring you meet your goals on time and allowing you to know when you have missed a contribution.
Compounding is a powerful concept that ensures your savings grow consistently. This stability is crucial for medium to long-term financial goals, such as saving to buy a car or retirement planning, where a steady and reliable growth rate is desirable. It involves earning interest not just on the initial principal amount but also on the accumulated interest from previous periods.
Over time, compounding results in exponential growth because each interest payment becomes part of the principal for the next compounding period. The growth rate accelerates as the interest compounds over time, leading to a snowball effect. The longer and more frequent the money compounds, the more your savings grow.
Different saving vehicles offer varying compounding frequencies. For higher returns, you need an account that offers high-interest rates and ensures frequent and automatic compounding. Accounts such as the Absa Digital Savings Accounts have features that ensure this.
For instance, the account offers daily interest accrual, which means that every day, interest is calculated on the account's outstanding balance. The interest is then paid out on a monthly basis.
The combination of daily interest accrual and monthly interest payout creates a scenario where the interest is compounded on a monthly basis. In addition to the 10% p.a. rate, these features reward users who save regularly and withdraw with less frequency, to accomplish medium to long-term goals.
On-the-go banking is the ability to conduct financial transactions and manage banking activities conveniently and efficiently using mobile devices.
It allows individuals to open and access their bank accounts, check balances, make payments, transfer funds, and perform various other banking tasks from anywhere at any time. This means no more queuing at bank halls and visiting ATMs to withdraw from your savings account.
This convenient and flexible banking approach has become increasingly popular with the widespread adoption of smartphones. Recognizing this trend, there has been a rise in digital banks, and commercial banks have also intensified their efforts to provide mobile apps that offer a seamless banking experience right at your fingertips, ensuring your financial well-being aligns with your dynamic lifestyle.
For instance, consider the Absa Digital Savings Account. It offers its customers a digital experience that lets you open an account online, in a matter of minutes, review and make transactions online, pay bills, and set up automatic savings transfers. This is all possible with just a few clicks on the user’s phone, whether they are at home or on the move.
2023 can be described as a turbulent year, but the lessons it has given us will help us plan better not just for 2024 but beyond. The unpredictable nature of 2023 has underscored the importance of financial preparedness, the need to preserve the purchasing power of our savings, and the value of convenient banking.
As we welcome 2024, it is paramount to reinforce the foundations of our financial stability. Therefore: