This article originally appeared on Money254. Money254 helps consumers and business owners to search, compare and apply for financial products in Kenya.
Saving is a very personal journey. And you will typically be saving for a specific objective, with targets to be reached, and milestones along the way. Maybe you will be saving in increments, such as the 52-Week Savings Challenge.
You could also be saving without a 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 short-term goals like a wedding party, buying a new car, or just transferring the surplus cash you might have in your current account to 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.
Advantages of savings accounts
Savings accounts provide a place to put your money that’s separate from your day-to-day banking needs, enabling you to stash money until you really need it or designate funds to attain your savings goal.
Furthermore, keeping money in a savings account is much safer than storing it under your mattress or pillow - which believe it or not, a good number of people still do. Some Kenyans, for example, either scared off by the failure of several banks over the last three decades or due to lack of information, lost significant sums of money when the CBK deadline to exchange the discontinued Ksh 1000 note elapsed.
And, of course, it eliminates the obvious possibility of losing all your savings from theft or hazards such as fire or floods.
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 help savings account holders to keep building their savings longer as opposed to withdrawing on a whim.
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 them 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 since, while your money may have increased by 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.
Easy and quick funds transfer
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 what is in 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 if 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.
You can have more than one account
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.
Limitations of savings accounts
Temptations to spend
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 your savings.
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 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.
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 accounts, 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.
Rates are subject to change
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. It is always a good idea to compare the interest rates offered by different banks before making a decision.
So, is a savings account good enough for your savings needs?
Because of the interest-rates put on savings accounts, it is 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, treasury bills and bonds, retirement accounts or stocks.
Also Read: Savings Accounts in Kenya: Know Your Options