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.
Whether you want to buy a new phone, go for a one-week vacation to Diani in December, or build a home, to turn your aspirations into a reality, you need to save money.
One of the important decisions you have to make after you have set your goal is to choose where you will save your money.
Depending on your objectives, there are many savings instruments to choose from in Kenya. Typically, they differ by interest rates, fees, and liquidity level.
When deciding where to put your money, you have to consider all those elements as they dictate how much returns your savings will generate, how accessible your money will be, and, importantly, if they align with your goals.
Some of Kenya's most common savings instruments are bank savings accounts, Sacco savings accounts, and Money Market Funds (MMFs). These three instruments can help keep your money safe and pay interest. Your choice will depend on your purpose of saving, expected returns, and liquidity.
In this article, using the Absa Digital Savings Account as an example, we will explore how bank savings accounts, Saccos, and MMFs compare.
Before choosing a savings vehicle, you must be clear about your reason for saving.
Are you saving to accomplish a specific goal, such as a short-term goal of building an emergency fund or going on vacation?
Or is it a long-term goal of saving for your child’s education, buying a house, or are you saving to curb a bad spending habit?
Once you know your goal of saving money, you can explore instruments that align with it. This will determine how much access you want to your money and the returns you will accept.
Think of three people: Martha, Stephen and Michael.
Martha is saving to build a 6-month emergency fund, while Stephen is treating his savings as a form of investment to earn interest and have an opportunity to borrow and self-guarantee. Michael, who has been in business for a year now, is saving to purchase a bigger printer by December for his fledgling business and doesn’t want to borrow.
Martha has narrowed her choices to MMFs and the Absa Digital Savings Account, which offers 9% interest per annum. A Sacco was not as attractive to keep her emergency fund due to the fact that one has to typically give on average a 60-day notice or pay a fine to withdraw.
Money Market Funds, while offering near-similar rates of return as the Absa Digital Savings Account, do not typically offer prompt withdrawal options - typically, you have to wait for 48 hours. Martha chose the Absa Digital Savings Account on account of ease of access during an emergency and monthly compounding of the relatively high interest that accrues daily.
Stephen, on the other hand, narrowed his choices to Saccos and the Absa Digital Savings Account. He figured that if he kept his money in a Sacco, he could borrow up to three times his savings with a guarantor or collateral while earning some decent interest.
The idea of having an MMF account interested him a lot, but he shelved it since he figured he couldn’t use savings in an MMF to access a loan facility in case he needed it. After learning that he can potentially earn dividends above 10% with Saccos, he chose to go with Saccos fully knowing that share capital (that earns dividends) is non-refundable and deposits (savings) could take two months to withdraw.
Then there is Michael who had a challenging time deciding between the three. He liked the Absa Digital Savings Account because of its high interest of 9% p.a., but since he already had an emergency fund, he figured the Absa Shilling Money Market Fund was a good option to keep his target short-term savings, hoping that the 48-hour or so window to withdraw would deter him from dipping into his savings. The idea of opening a Sacco account for this purpose was dropped since he felt it was more suitable for a long-term goal such as developing his 50*80 plot in Juja in a few years to come.
Your situation might differ from Martha’s, Stephen’s and Michael’s, but as you can see each product is better suited for a specific goal - and also specific individual’s needs.
Suppose you are saving money to curb your bad spending habit or don’t have a saving goal. In that case, you can consider building an emergency fund first and keeping it in an accessible account like Absa Digital Savings Account and then developing other goals.
An emergency fund is that all-important financial cushion you need when something unexpected (financial emergency) happens. It keeps you from getting into unplanned debt and most of all gifts you peace of mind to keep pursuing the goals you are most passionate about.
Liquidity refers to the accessibility and ease with which you can withdraw your funds when needed. Different factors, including your savings purpose and emergency preparedness, will determine your desired liquidity level.
When compared to the Absa Digital Savings Account and MMFs, Saccos are the least liquid option as they do not allow prompt withdrawals. To withdraw your savings from a Sacco, you must give notice of withdrawal 60 days prior. Some Saccos offer faster withdrawal, but you will be charged a commission in lieu of the notice.
And if you had converted your Sacco deposit to shares, you won’t be able to withdraw them. The only way to liquidate them will be to transfer them to another member. While Saccos don’t allow instant withdrawal, they let you borrow against your deposit and/or shares. Emergency Sacco loans are typically processed faster than withdrawals. However, you will need to repay the loan with interest.
Typically, Money Market Funds (MMFs) allow you to withdraw your savings at your request, but they have some limitations and restrictions, including:
With the Absa Digital Savings Account, during an emergency or any other urgent need for cash, prompt withdrawals are facilitated. You can conveniently access your savings with no penalties charged or lengthy notices. This can come in handy during an emergency or when an investment opportunity presents itself, and you need cash.
Additionally, unlike is the case with other savings accounts like Fixed Deposits, when you withdraw your money from Absa Digital Savings Account, you don’t forfeit interest. Any interest your savings had accrued at the time of withdrawal will be paid at the end of the month. This is because this account calculates interest on the daily outstanding balance.
Why is this important?
Consider this scenario. It is the end month and your salary has been delayed. Instead of borrowing money, you withdraw Ksh10,000 from your emergency fund saved in Absa Digital Savings Account. Any interest the withdrawn amount had earned up to the point of withdrawing won’t be lost, and you will still earn interest on the remaining balance in your account after the withdrawal.
Later when you receive your salary, and you can replenish your emergency savings by returning the Ksh10,000, it will start earning interest the same day.
Once you have fully understood the liquidity level of each option, it should be easier to choose an account that best meets your accessibility needs. For instance, you should consider saving your emergency funds in an account with the highest liquidity. Less liquid options may be considered for longer-term goals.
Whether you keep your money in the Absa Digital Savings Account, Saccos, or MMFs, you will still earn returns in the form of interest. Like most saving vehicles that pay interest, they will most likely hedge you against inflation and grow your savings. However, the total returns you earn will vary depending on your option. Let’s break it down.
In 2022, according to a Cytton report, the highest-yielding MMF offered an average annual return of 10.8%, while the lowest offered a rate of return of just 7.7%.
According to Sacco Societies Regulatory Authority's (SASRA's) 2021 annual report, Saccos offered annual interest rates on savings ranging from 6.83% to 10.55%.
Absa Kenya’s Digital Savings Account offers one of the most competitive interest rates offered by commercial bank savings accounts in Kenya at 9% per annum.
The Absa Digital Savings Account, Sacco Savings Account, and MMF offer almost equal returns. However, to know which account will help you achieve your target goal, you need to consider the following factors:
MMFs, like the Absa Shilling Money Market Fund, calculate interest daily and pay them monthly. However, interest is not automatically compounded as is the case with Absa Digital Savings Account. To benefit from compound interest, you will need to reinvest your interest.
Saccos calculates and pays out the interest your savings generate annually, on a pro-rata basis, and doesn’t compound the interest. You can compound the interest by “reinvesting” it, i.e., depositing it as a new principal yearly.
Among the three options, Saccos have the highest fees. Apart from transactional fees, some charges you might incur include joining, account opening, and account closure fees. Some Saccos also charge an annual ledger fee.
MMFs charge an annual management fee that varies depending on the fund manager, ranging from 1.25% to 2%. Additionally, some MMFs also charge withdrawal fees that can cut into your returns. Some MMFs may also charge an initial or one-off joining fee.
The Absa Digital Savings Account doesn’t have any charges. Everything from account opening and account maintenance to depositing and withdrawing is free. This means you are guaranteed the maximum returns promised.
Among Absa Digital Savings Account, Sacco, and MMF, only the first option doesn’t attract any penalties. The other two can have multiple penalties.
Some of the infractions that can result in a penalty with Sacco savings include; your account falling below the minimum balance requirement, not making monthly contributions, needing to withdraw without a 60-day notice and closing your account.
MMFs may attract penalties such as exceeding monthly withdrawal limits and not making monthly minimum top up.
When comparing savings products, it's beneficial to calculate the effective annual yield, which considers compounding and any associated fees. This allows for a more accurate comparison between different options.
Remember, while interest rates and returns are essential, aligning your savings strategy with your financial goals and liquidity needs is equally crucial.
Now that you know what to look for in a savings account, which one will you choose?
The Absa Digital Savings Account has an accessibility advantage, no fees or penalties, and can help you save towards your short and long-term goals. This makes it attractive as a saving vehicle as you are guaranteed easy access to your money during emergencies and higher returns thanks to its attractive 9% p.a. rate compounded monthly and no fees to eat into your returns.
Additionally, there is no minimum balance requirement. This means you can withdraw and replenish your savings without suffering any penalties.
MMFs have a lower minimum initial investment than Saccos and are more liquid. Saccos, on the other hand, can be a form of investment if you are looking to earn dividends and you can qualify for loans on account of your savings.
Ultimately, your end goal should dictate your choice.