Should You Keep Your Savings in A Current Account?

I, surely, can speak for most of us who have only one bank account. You most probably opened this account when you needed your HELB loan or when you started working. I know I got mine because my first employer wouldn’t pay me in cash. 

In this account, money comes in and goes out often. We use it to receive our incomes and withdraw from them often. It is basically our current account. For some, the account serves as a savings account - the difference between money in and money out at the end of the month counts as savings. But should you be keeping your savings in a current account?

How Do Current Accounts Work?

Originally, current accounts were primarily used to facilitate the transfer of funds, in the form of cheques, to a recipient. 

So let's say you write a cheque to your plumber as payment for a job done. After receiving your cheque, the plumber would deposit that cheque into their current account. The bank would then execute the instruction to withdraw the indicated money from your current account and then credit it to the plumber's account.

But then technology happened and now there are many ways to use a current account without using a paper check, such as:

• Debit card
• ATM card
• Wire transfers
• Agents
• Mobile banking apps

While several banks offer zero-fees current accounts, others charge fees depending on the current account type you choose. Some of the fees associated with current accounts include:

• Monthly Maintenance Fee: Charged by some institutions for holding an account with them.
• Overdraft Fee: Charged for using the overdraft facility when there isn’t enough money in your account to cover a transaction.
• ATM Fees: Charged when withdrawing at ATMs
• Cheque Ordering Fee: Charged each time you reorder new cheques.
• Inactivity Fee: Charged by some banks to reinstate a dormant current account. 

Using a Current Account as a Savings Account

There is a significant number of people who keep all the money they have in one bank account - the current account. The idea is to withdraw only what they need to spend and the remainder counts as savings. Keep doing this every month and your bank balance keeps growing - savings!

While the general idea of saving is still followed here, it is generally not such a great idea to keep your savings in the current account. This is simply because this account is not designed for keeping savings. It is an account to facilitate transactions - receive payments and make payments or withdrawals - that’s it.

The ease of access to the funds in a current account makes it unideal for storing your savings since it is quite easy to redirect your savings to an expense. 

You ideally want to keep your savings somewhere which makes it a  little harder to withdraw such that before you use your savings you have exhausted all other avenues of raising money to cover whatever expense that has come up. 

How Much of Your Money Should You Keep in the Current Account?

That said, the current account is a useful account to maintain and should be regularly funded. The question is how much of your income you should be keeping in the current account to facilitate transactions but also separate your savings.  

So, you have to ask yourself, how much money do you need for daily use throughout the month. How much do you want to be saving every month? And how much money would you want to have easy access to in case of an emergency? 

To decide on how much of your income you should be keeping in a current account, the 50/30/20 budget rule can be a good guiding tool. We will use it as an example of how to think about the proportion of your income to maintain in a current account. 

Essentials (Fixed): 50%

These are the basic needs that help you live. I would call them the bare minimums. They include your monthly bills, including food and all. For these, there isn’t an alternative. You will just have to pay for them

Discretionary Money: 30%

This is the bucket where your wants or desires go. It’s the money to use on wants instead of needs. Luxuries and entertainment also fall in this category

Financial Goals: 20%

This is the last portion. You are to commit at the very least 20% of your income towards your savings. This can include retirement benefit accounts, savings plans, debt repayments, and emergency funds.

You ideally want to keep the 50% for needs in your current account so that you can easily make the payments that you need to make.

For the 30% of your income set aside for discretionary expenses, you may or may not use this money depending on your budget. So, the ideal route when thinking about where to keep this money is to truly determine how much of it you are going to spend that month. Then keep that in the current account. 

You can tailor the rule to match your spending plan, for example, it can be 50/20/30, 50/10/40 or even 50/50 if you are a big saver. 

Whatever you have decided you want to save should then not be kept in the current account. Some of the better alternatives to the current account include; 

1. Fixed deposit accounts - For these, large sums of money are required to open one. Withdrawals can be made only after the agreed period. There is interest earned and the deposits can be used as security or collateral for a loan.
2. Savings accounts - It is more suited for small savers. A smaller sum is needed to open an account compared to a fixed deposit account. Withdrawals can be made but there are monthly to annual limits. It has a lower interest rate than a fixed deposit.
3. Treasury bills and bonds
4. High yield savings account
5. Money market funds and mutual funds

WRAPPING UP

Current accounts are designed to enable transactions - receive payments, and make payments/withdrawals. 

Using a current account to keep your savings denies you the chance to earn interest on them or generally grow what you are saving, makes your money susceptible to inflation (losing value), and increases the risk of overspending and depleting your savings due to ease of access.