Most of us if not all have financial goals to achieve after a certain set period. Be it short-term or long-term. After setting goals, we formulate strategies to build up to attain these goals. Among them is saving. It requires a lot of discipline to put aside money. However, it also needs some considerable thought as to where to put those funds.
Before you start to save, you have to assess your financial muscles. What is your income? How much in total do you spend? How much do you have left and what use can you put it to?
Some factors may impede or drag your potential to save. Take debt for example. Owing money to lenders can weigh you down financially causing delays in your financial goals.
For this reason, it is better if you try to do away with it as soon as possible in the cheapest possible way. You may choose to service your debt and save at the same time or to clear it completely especially if it is a punitive debt with high-interest rates then embark on saving.
Choose whichever is the cheaper option for you.
When your debt levels are too high, it becomes more difficult to consider setting aside money for saving. But saving is actually among the most important steps you could take toward being debt-free.
There are so many options for you to keep your money if you are saving. Which one should you settle for? That depends on three main factors.
Above all this, you have to have a clear reason for why you are saving. This is not only important in helping you determine the best place to keep your money to fulfill this purpose but also as motivation to actually keep saving consistently.
Today we discuss what avenues there are to save your money. Let’s look at a few.
The current account is the most common type of bank account opened by individuals to be used to facilitate regular transactions. Your salary gets deposited here, you can give standing orders from your current account to pay regular bills such as subscriptions, loan repayments or hire purchase obligations, and so on.
These accounts provide a higher number of transaction limits on monthly cash deposits and withdrawals as compared to other accounts such as savings accounts.
One very important feature of this account is that it bears zero interest. The funds held here are always available to the account holder whenever they need them. The bank in return does not offer any interest for them in compensation for the extra liquidity.
Current accounts may charge holders a fee for every transaction or an account maintenance fee monthly that caters to all the transactions that take place within the month.
Putting your savings in a current account may not be the best idea. This is because a current account does not accrue any interest on the money deposited. It is essentially a place to put your money for safekeeping and to easily effect transactions.
Some people may erroneously consider a current account a savings account and keep building up the balance where they see the balance at the end of the month as ‘savings’. While technically, they are your ‘savings, the current account is not exactly designed to be a place to put your savings but rather to keep money that you need to access as quickly as possible at a moment’s notice.
And for this purpose, there is no better place to do so - maintain money for your monthly expenses, any money you know you need to spend on any obligations that you will not need to sign any paperwork or wait a single working day to access.
A traditional savings account is another place to keep your money. It is an account you typically open along with a current account, but one which you don't want to withdraw from regularly.
This means it isn’t for shopping or automatic subscription payments. Different financial institutions have different processes to open an account. Some can be done online while others require a physical visit to a branch.
Savings accounts have the advantage of earning one an annual interest rate on deposited amounts with some even offering a biannual or quarterly interest payout.
In Kenya, interest rates for bank savings accounts range from a low of just 1% to a high of 7% which is just above the annual inflation rate of about 5.5% in 2021.
Ideally, you want a savings account that gives you an interest rate higher than the annual inflation rate, otherwise, your money loses value (purchasing power), as it would surely do if you left it in a current account.
Some banks will have a minimum interest-earning balance which means, you have to have up to or more than the stated amount for your saved money to earn interest.
It also means that if you withdraw from the account and your balance falls below the minimum-interest-earning balance, then you are not entitled to earning any interest.
Another feature of this type of account is that it has a limited number of withdrawals you can make within a certain period. Depending on the bank, you may withdraw only once a month, quarterly, biannually, or annually.
If you exceed the withdrawal limit, you may be charged a penalty or be forced to forfeit all interest earned.
If you already have a current account, you can place a standing order that every month automatically deposits a specific amount into your savings account. This can help you to seamlessly fund your savings account as long as you ensure your current account always has money on the specified date.
For most banks, standing orders are always free for intra-bank transfers.
This type of account earns typically higher interest than the ordinary savings account. Returns from this account are modest, ranging from 4% to 10% per annum.
A very good benefit of this savings account type over some other savings vehicles of the same kind is that in money market accounts your money remains liquid, and some institutions even offer bankers the flexibility to write checks.
Some of the people who use money market accounts deposit money that is to be needed soon, like for a vacation fund or a holiday gift budget.
Mutual funds combine funds of many investors into a diversified portfolio of securities like stocks and bonds. They can be a great choice for investors since they are professionally managed and generally have a lower risk due to their diversified nature.
However, mutual funds still carry some level of risk, especially ones that comprise volatile securities. One can trade mutual funds once per day while the market is still open.
A Fixed deposit savings account also known as a Certificate of Deposit (CD) is one way to earn fixed interest on your savings. And it is very low-risk.
What happens is that the bank pays you a small interest on the condition that you leave your cash in the bank account for a fixed period. Your amount matures when the agreed period expires. That is when you get paid your principal and the accrued interest
The amount of interest earned on your savings is dependent on the size of your deposit amount and the length of the period of maturity.
For example in the Standard Chartered bank, the annual interest rate for an account with a six-month term ranges from 1.35% for amounts less than Ksh2 million to 4.5% for amounts above 100 million, versus 2% and 5% respectively for a twelve-month term account.
One downside of a Fixed-interest deposit account is that you will be penalised if you choose to access your money early. The penalty will typically be forfeiture of interest earned.
These are financial instruments utilised by the Government through the Central Bank of Kenya (CBK), to raise funds. In other words, the government is borrowing money from its citizens.
The Government usually does this to enable it to meet its budgetary deficits or assist it to do capital projects that require extra-budgetary support.
The main difference between the two is the tenure and minimum deposits; bills are for the short term (less than a year) and the minimum amount a person can invest is Kshs 100,000 while bonds are for the long term (typically above 1 year) with minimum investments of Kshs 50,000.
The interest rates of treasury bills range from 7.3% for 91-day bills to 8.1% for the 182-day bills and 9.8% for the 364-day bills.
Treasury bonds offer interest rates (referred to as coupon rates) of between 10% and 14% depending on the length (tenure) and other factors relating to government-set interest rates.
Government securities are therefore generally considered to be better places to keep your savings as compared to savings accounts given the higher interest rates.
They are also considered to be of little to no risk since it is very unlikely that governments can default.
They, however, do have the disadvantage of keeping your money locked up for longer periods (especially with bonds) meaning you have to be sure you do not need to withdraw the money at a moment's notice.
However, you can trade the securities in the secondary market at any time and recover your savings - the disadvantage is that you are likely to get less than you would have if you waited for the security to mature.
Are you saving for your retirement? When exploring where to keep and grow your retirement fund most of the options above can still apply including the current account, savings account, fixed deposit account, and even treasury bonds.
But it is the retirement accounts that are specifically tailored to help you save for your golden years, although it doesn’t necessarily mean you must open one.
One good thing about retirement accounts is that they do not allow you to easily withdraw without severe consequences such as forfeiting all interest accrued and other surrender charges. This incentivises you to keep that account, particularly for the very important goal of securing your requirement.
It also means that while you have a retirement account, you will need to be saving money elsewhere for your other life goals such as owning a home, investing, and for emergencies.
Retirement accounts typically come in two types;
Retirement accounts, upon maturity (that is upon the attainment of the stated retirement age), pay their pay account holders in these options.
There are generally two ways to think about saving money. One is saving money for the purposes of creating cushions against income disruptions and achieving short- to medium-term goals. The second one is saving for the main purpose of growing your net worth i.e. investing.
When the purpose is investing, then the element of risk is undeniable. But so is the possibility of reaping rewards. Here are some riskier options of where you can put your savings.
Purchasing individual stocks enables one to own shares of certain companies and thus entitled to a share of the profits every year. Stocks offer one of the greatest potentials for growth when compared to other securities such as the government securities discussed. This means investing in stocks could bring back high returns over time.
But there is another side to it. A stock’s value can as well swing in the other direction and this volatile nature makes them risky and quite hard to manage. Therefore, it wouldn’t turn out well if you were to put a lot of your savings into stocks of just one company. There would be devastating losses if the value of the stock plummets and does not recover afterward.
It’s wise to balance this risk with more stable assets. Do consider how far in the future your savings goals are when you’re determining whether to buy stocks. For people nearing retirement, it would be safer to put your savings in low-risk securities, such as bonds. Younger investors have more time to ride out losses so they are more flexible to go for stocks.
As you can see, stocks are essential high-risk places to put your savings especially if you are not very skilled at evaluating the markets. A financial adviser can guide you when making the decision to invest in stocks.
It has now become possible to invest in commercial real estate like storage units, rental properties, and office buildings without needing the large money for capital also without having to buy or manage real estate.
REITs raise funds from shareholders to acquire or build real estate and then sell or rent them out to generate an income which is then distributed to shareholders annually.
The REITs market is not very developed in Kenya although the regulatory framework was launched in 2013. There are about 10 licensed REIT managers in Kenya including Acorn Investment Management, Cytonn Asset Managers Limited (CAML), Stanlib Kenya Limited Nabo Capital, and ICEA Lion Asset Managers Limited.
When thinking about putting your savings in real estate, there is always the individual acquisition of land, an investment method preferred by most Kenyans despite the high risks of fraud and the prohibitory prices that make it an option for those with significantly higher incomes or savings.
Owning gold is one way to diversify your portfolio - which entails investments made in different assets so that if the price of one type of investment goes down, the prices of others will increase. Gold acts as good protection for saving against inflation. However, there are risks.
Gold is volatile in the short term and doesn’t appreciate in the long-term like stocks or bonds. It's advised by financial advisors not to invest more than 10% of your money in gold.
When talking about savings, there isn’t really a right or a wrong answer. It ultimately boils down to your needs. If you're often using your savings to protect yourself from overdrafts and you want to have it readily available in an instant when you need it, then a traditional or high-yield savings account could be an appropriate choice.
If you have a goal to make a large purchase or an item whose price is predictable in the future, you will probably find better interest rates with a fixed deposit account or possibly a money market fund account.
If you are saving for retirement, then it is worth considering retirement accounts and determining if the income at maturity will cover all your post-retirement expenses.
Depending on your risk tolerance, you may consider riskier options to put your savings that have the potential to give you high returns such as REITs, gold, and stocks.
Ultimately, the objectives for saving will determine where you keep your savings. You will typically need to keep your savings in more than one place to meet all your objectives since each financial product is optimised for a majorly one purpose.