Where do I keep savings? This is the third article in a series that tries to help you answer this question of the best place to put your savings for maximum benefit depending on your reasons for saving.
In the previous articles, we have looked at the 7 main places to put your savings where we explore in detail the different major vehicles for keeping your money. The second article asks the question, should you keep your savings in a current account? which a good number of bank account holders seem to have been doing and we explore the appropriateness, risks and opportunities of such a decision.
Here, we take a deep dive into savings accounts specifically and whether it is the right place to keep your money; how much, when and for what purpose.
What do you know about savings accounts? everything? a little? nothing? worry not. For a full understanding of savings accounts, Money254 earlier prepared a complete guide on all you need to know about savings accounts.
This article specifically talks about savings accounts offered by commercial banks and microfinance banks.
Saving is a very personal journey. And you will typically be saving for a specific objective, with targets to be reached, milestones along the way and maybe you will be saving in increments such as the 52-Week Savings Challenge.
You could also be saving without a very specific goal in mind other than the fact that you need to be keeping some money aside as you figure out what major goals you want to achieve.
Savings accounts typically offer modest interest rates. Their rates typically range from 1.5% to 7% depending on which financial institution you choose to save with.
Even though some of these accounts have some limitations on how frequent you can withdraw funds from them, they generally have exceptional flexibility that is ideal for creating an emergency fund, saving for goals set for the short term like a wedding party, buying a new car, or just transferring the surplus cash you might have in your current account so that it can earn some interest.
A savings account can be a good option to keep your money, but is it the best? Let's dissect the pros and cons of a savings account.
Savings accounts provide a place to put your money that’s separate from your day to day banking needs, enabling you to stash money for a time you will really need it or designate funds to attain your savings goal.
Furthermore, keeping money in a savings account makes it much safer than it is stored under your mattress or pillow - which believe it or not, a good number of people actually still do. Some Kenyans, for example, either scared of by the failure of several banks over the last three decades, or lack of information, lost significant sums of money when the CBK deadline to exchange the discontinued Ksh1000 note elapsed.
And, of the course, there is the obvious possibility of losing all your savings from theft or hazards such as fire or floods.
But in a savings account, your money is insured by the Kenya Deposit Insurance Corporation (KDIC). So you are guaranteed that whatever happens, including an unfortunate collapse of your financial institution, you will still have your money.
One additional security advantage a savings account can offer is security against yourself. Many savings accounts will not allow you to access the account with an ATM card, USSD or via mobile banking apps thus discouraging unplanned withdrawals.
Restrictions on the number of withdrawals also helps savings account holders keep building their savings longer as opposed to withdrawing on a whim.
Read Also: How Customer Bank Deposits Are Protected
Beyond keeping your money safe, savings accounts earn some interest. This means that it pays to stash any surplus funds you may have in a savings account instead of keeping the cash in your current account, where it will, most likely, earn very little or nothing at all.
With some savings accounts offering interest rates of up to 7%, you are sure to have more value for the money you have been keeping aside. The annual inflation rate for 2021 was about 5.4%, a savings account will not only maintain the value of your money, but will also increase your savings balance - this is as compared to a current account which will barely earn you any interest and is subject to inflation.
Note that a savings account that offers an interest rate lower than the annual inflation rate may not be the most ideal option given since, while your money may have increased by say, 4%, its purchasing power is lower.
Why are you saving your money?
Aside from your money being safe and gaining some interest, your access to funds remains extremely liquid, unlike other vehicles like fixed deposit accounts, where a penalty is imposed if you wanted to withdraw your funds sooner than the stipulated time.
If you want to easily access your money whenever a need arises such as an emergency, all factors held constant, then a savings account can be a good choice for you.
Note that each savings account will have specific withdrawal limits that you can discuss first before opening the account to choose one that best fits your reasons for saving.
Having a savings account in the same financial institution as your current account can be very convenient and efficient. Since funds transfer between two accounts at the same institution is usually instantaneous and mostly free, withdrawals or deposits made to your savings account from your checking account will be executed right away.
This makes it very simple and easy to transfer surplus money to your savings account and have it earn interest as soon as possible. You can also transfer money the other way round if you need more money than that which is your checking account.
Note that withdrawal restrictions will still apply even if you hold a savings account with the same bank that you have a current account with.
One important thing to note when automating transfers to your savings account is that in the event that a standing order is in place and there is no corresponding amount in your current account, you could incur a penalty. So, it is always important to time the transfer when you know you will have some money in your account, or cancel the standing order as soon as you realise your current account balance is low and the date is near.
There is typically no limit on the number of savings accounts you can hold at a financial institution. This can be handy especially if you want to track your savings progress on multiple goals. For example, you can have one account to save for a wedding and a separate one that holds the money you will use to buy a car.
While savings accounts generally offer liquidity as one of their main benefits, it could also be its downside. This is because having readily available funds may tempt you to spend more than you need dipping into what you have saved.
In contrast, it’s more difficult to take out money from a bond, withdraw from a retirement account, or sell a stock than it is to withdraw from your savings account, especially if the account is directly linked to your checking account.
This will usually be a limitation for someone looking to keep their money in an account that they can access at the snap of a finger - through a mobile app, mobile banking USSD etc.
You will find most savings accounts only allow in-person withdrawals, as a way of encouraging account holders to hold on to their savings.
Depending on the account type, also, you may be allowed only one withdrawal a month, once every quarter or even once a year - or otherwise risk paying a penalty for early withdrawal.
If you are saving for specific goals, with specific timelines such as purchasing a big appliance in six months, then the savings accounts may not be a bad option for you.
One of the drawbacks of savings accounts is the relatively low interest in the modern day’s low-interest-rate environment.
As we mentioned earlier, if your savings account isn’t paying a competitive interest rate, inflation could be swallowing the value of your money, leaving you with an account with a balance that is worth less a year from now than it is today.
The trick is to choose an account that has an interest rate higher than the inflation rate. This may at least guarantee value will be retained, if not higher than what you saved when the year ends.
Note that you are choosing a savings account with a specific reason. Was earning interest part of the reason you chose a savings account? If that is the case, then you may want to consider options that have higher interest rates such as fixed deposit account, Sacco shareholding, stocks, bonds and treasury bills among others.
You, however, have to realise that these options that guarantee higher returns have their limitations that may be in conflict with your savings goals.
Savings account interest rates can be varied. This means that a financial institution has the liberty to set or change interest rates as they deem fit. High-interest savings account rates will largely stay in line with the movements of the Central Bank of Kenya set rates.
Because of the interest-rates put on savings accounts, it’s critical to understand what they are good for and what they aren’t.
As I had mentioned earlier, savings accounts are a great place for emergency funds and sinking funds. But they are not really a place for you to grow wealth. You won’t build wealth if you’ll only use a savings account. For you to build wealth you will have to invest.
As for me, I like to think about time as the best reference to help me decide where to keep my money. For the money that you may require in a short period (e.g., an emergency fund, short-term savings goals, etc.), I’d keep my money in a savings account. But in the case of long-term goals, it’s okay to consider investing instead.
It is your choice where you keep your money. How you assess your needs and what you are looking to gain out of them. Also look out for other money instruments like the money Market fund and mutual funds, the Treasury bills and bonds, retirement accounts or stocks.