Everyone knows they need to save money. Yes, even those who justify their overspending with "you only live once." There is a tonne of reasons to save, but primarily, it's to achieve financial independence. So, where should you put your money when you decide to save?
There are many saving vehicles to choose from depending on your needs and financial goals. These instruments help keep your money safe and protect you from inflation by generating income. They'll usually earn you interest or dividends. However, some instruments, like land, appreciate.
When choosing a savings vehicle, you must consider your goals, time horizon, and risk tolerance. This will ensure you put your money somewhere accessible, generate enough returns to help you achieve your objectives, and mitigate losses.
With many saving methods to choose from, you must pick the ones that will help you accomplish your goals. This article will explore ten places you can keep your money and the pros and cons of each to help you make a better decision. Read on!
Read Also: 10 Reasons to Start Saving Now
Fixed deposits (FD) are a saving instrument that banks and other financial institutions like Saccos offer their customers. FDs involves saving a certain sum of money, for a fixed period, at a predetermined interest rate. The rate is usually higher than the interest offered on normal savings accounts.
Fixed deposits are also known as term deposits. They have different tenures that range from one month to ten years. The longer the maturity period and the amount, the higher the interest.
There are two types of FDs depending on how you earn interest.
Cumulative FDs: Interest is paid at maturity. The interest will be reinvested in your fixed deposits depending on the compounding method the financial institutions offer. At maturity, you receive all interest and principal amounts.
Non-cumulative FDs: You will earn interest at fixed intervals depending on the terms of your fixed deposit. It can range from monthly to annually. This method is suitable for people who need a regular income stream.
Fixed deposits are suitable for people with a low-risk tolerance, individuals saving for short-term goals, retirees looking for stable investments, and investors balancing the risk of their overall portfolio.
A high-yield savings account is a type of savings account that lets you earn higher interest on your savings. While they might not earn higher returns like fixed deposits, they are better than traditional savings and checking accounts.
High-yield savings accounts are specifically important for people saving for specific medium to long-term goals and those who want to develop a savings culture. They work in a simple way. You open an account with a minimum deposit of less than Ksh1,000, then continue contributing to the account regularly to grow your savings. They are usually no minimum or maximum balance.
There are two main differences between high-yield savings accounts and fixed deposits. One, you have more access to your money if you save it in a high-yield savings account. Two, unlike fixed deposits, the interest rate of high-yield savings account are not fixed. That means the market determines them; they can go up or down.
Money market funds (MMFs) are a type of savings instrument that pools money from different investors and invests it in low-risk instruments. Typically, they invest in secure debt securities like treasury bills, fixed deposits, and commercial papers. The type of vehicles MMFs invest in makes them safe for people with low-risk tolerance.
In Kenya, you can invest in MMFs through your bank, SACCO, and other financial institutions like insurance companies and pension schemes. MMFs are usually very liquid, and you can access your money anytime. They suit people who want an alternative to bank accounts and looking for slightly higher investment returns.
MMF investors earn interest determined by the performance of the investment instruments their unitholder (MMF issuer) invested in. The interest is compounded daily or monthly, depending on your chosen MMF.
Although MMFs are not insured like bank accounts, they're safer than other unit trusts funds like equity funds and balanced funds. They are regulated by the Capital Market Authority (CMA) and are required to invest in low-risk and short-term vehicles to minimise losses for investors.
Equity funds, like MMFs, are pooled funds professionally managed and regulated by CMA. The main distinction between these two saving instruments is the type of investment they pick. As you have read above, MMFs invest in low-risk instruments that generate interest. Equity funds take a different route and invest in growth assets with higher risk aptitude, like stocks and shares.
Equity funds suit investors with higher risk appetites and can withstand market volatility. These types of funds are actively managed to outperform the markets. Financial institutions like banks and insurance companies offer equity funds. It is also important to remember that equity funds attract higher management charges than MMFs.
In times of economic uncertainties, investors usually flock to instruments with the lowest risk exposure. In Kenya, that investment is are government-backed debt instrument. They include:
Treasury Bonds: These are a secure, medium- to long-term investment that will typically earn you interest payments bi-annually throughout the bond's maturity. The central bank auctions treasury bonds monthly and usually offer attractive fixed interest rate.
Treasury Bills: These are short-term investments offered weekly by the central bank, with different maturity periods of 91, 182, and 364 days. They’re issued at a discounted cost and mature at face value.
You can invest in treasury bonds and bills individually or through a middleman, usually a financial institution like your bank. You will get the highest returns when you invest individually, but you need a CDS account and will be required to follow the whole lengthy process of investing.
Corporate bonds are debt securities offered by corporations. In simpler terms, you can think of corporate bonds as lending your money to a company; in return, the company pays you fixed interest. The interest (also known as a coupon) is paid at agreed intervals until maturity when you will receive your initial capital.
A corporation usually offers bonds when they need to raise money to fund operating expenses, expand, or acquire other companies but don’t want to sell shares. Corporate bonds usually have higher returns compared to government-issued bonds. But with higher returns comes higher risks. Investors have to think about default risk when investing in corporate bonds.
This makes corporate bonds attractive to people with a high-risk tolerance. You can invest in Corporate Bonds individually or through equity funds.
Pension schemes are benefits that allow individuals to save money during their working years and access funds when they retire. They provide one of the easiest ways to save for your sunset years. Individuals can invest in pension schemes by making monthly deposits of as low as Ksh200.
The most predominant pension scheme is NSSF. However, there are other RBA-registered schemes you can choose from.
Pension schemes work in a simple way, and anyone with a regular income to meet the minimum monthly contribution can invest in them. You make your monthly contribution, the scheme invests the money, and after you hit retirement age, you redeem your pension. You can withdraw it as a lump sum or in monthly installments.
Traditionally, real estate has been an excellent tool for building physical wealth. It adds diversity to your portfolio and lowers your overall investment risks. Real estate can help you avoid inflation risks and help you generate income in different ways.
There are multiple real estate investing strategies you can choose from; the common ones are:
Real Estate Investment Trusts (REITs): These are dividend-paying investments that are traded on the Nairobi Security Exchange (NSE). They pool funds from different investors and invest the money in real estate holdings like commercial buildings. After all deductions, returns generated by the investment are shared with investors.
Buying and Holding Properties: This strategy involves buying a piece of land or house and holding it for capital appreciation. The property is usually for personal use and generates no income.
Renting out Properties: This strategy involves buying and using a property for commercial reasons. You can rent the property and generate income. It is the best strategy when investing in real estate.
Saccos are member-based organisations that pool members' resources together and invest them in a way that benefits everyone. The returns from the investment are paid out to each member as dividends depending on their number of shares. Saccos are the most popular investment and saving vehicle for working-class Kenyans.
Since its formation in 1908, Saccos have grown and currently offers many front-office services that were previously restricted to banks. These services include current accounts, finance automation, Internet banking, banker's cheque, and financial advice.
Since its formation, Sacco's main objective was to allow members to access cheap credit. Today, they can borrow as much as 3x their savings. They can keep their rates lower than banks and credit unions because members vote and agree on the interest rate during their annual general meeting.
Read Also: Top 5 Reasons to Join a Sacco
Life insurance is a type of investment that helps protect your dependents from financial instability after your demise. While anyone can buy this cover, it is specifically important for individuals who are breadwinners in their families. It is also an investment vehicle you can include in your retirement and estate planning.
There are two types of life insurance:
Term life insurance: This type of policy lasts for a fixed period ranging from 3 to 20 years. You will pay a premium during that period to the insurance company during that period to maintain coverage. After the period lapses, you can claim it.
Whole life insurance: This policy is taken for your lifetime and can only be claimed after your demise. It is designed to provide you with life-long protection. With this policy, you pay a set of fixed monthly premiums.
Saving money is one of the simplest ways to start your wealth-building journey. While it might seem like an easy investment, you need to approach it carefully, especially when choosing your preferred saving vehicle.
First, consider your risk tolerance. If you are a conservative investor with a low-risk tolerance, you should consider KDIC-insured savings products. This will lower your risk exposure.
The second is flexibility. How accessible are your savings, and can you meet any minimum monthly contributions? Answering these questions will help you avoid liquidity risks and penalties in the future.
Finally, think about your goals. How you save for retirement will differ from how you save to educate your kids or buy a house. It is advisable to open different savings accounts for different savings goals to make tracking your progress and spreading out risks easier.