When you want to save up money for something, such as a car, a house, or even a trip to the coast, you have several options.
You could keep the money in a current account, or, you could keep the money in a piggy bank or in a safe in your home. .
However, if you want to hit your savings goals easily, while at the same time keeping your money safe and secure, opening a savings account is a great option.
However, this doesn’t mean that every savings account available will work best for you. You need to find a savings account that is best suited to your needs and goals.
In this guide, we are going to give you a rundown of everything you need to know about savings accounts, including what savings accounts are and how they work, the benefits of savings accounts, factors to consider when choosing a savings account, and so much more. Let’s dive in…
What is a Savings Account And How Does it Work?
A savings account is a basic type of account offered by banks and other financial institutions, that allows you to earn interest on your deposits.
If you keep Ksh100,000 in a current account for a year and make no withdrawals, you’ll have Ksh100,000 at the end of the year. If the type of current account you have charges account management fees, you’ll actually have less money than you deposited at the end of the year. Currents accounts typically do not earn any interest due to the fluidity they offer
With a savings account, on the other hand, your money keeps growing. For instance, if you keep the same Ksh100,000 in a savings account offering 8% interest per annum with yearly interest payouts, you’ll have Kshs108,000 at the end of the year.
In addition to allowing you to earn interest on your money, many savings accounts also have a limitation on the number of withdrawals you are allowed to make. Some savings accounts only allow you to withdraw your money from a bank teller, and do not come with a debit card.
This provides a psychological benefit – with your money less accessible, you are less likely to spend the money on impulse expenses you had not planned for, which in turn makes it easier for you to achieve your savings goals.
How does the bank afford to pay you interest on money deposited in a savings account?
When you deposit your money in a savings account, the bank lends the money to other borrowers at an interest. They then use the interest paid by these borrowers to cover their operational expenses and pay you interest on your deposit.
Types of Savings Accounts
There are three major types of savings accounts offered by financial institutions in Kenya. These are:
- Regular Savings Account
This is the most basic type of savings account. A regular savings account doesn’t come with many conditions – there are no limitations on how much money you need to deposit per month, how long you need to keep the money in the account, and so on.
The regular savings account is best suited for someone without a very specific savings goal in mind, such as someone who is just saving money for a rainy day, or one who simply wants to build up a pool of money as they figure out how to invest or spend the money.
A regular savings account also gives you access to your money whenever you need it, provided it is within the stipulated guidelines.
For instance, if your savings account allows you to make one withdrawal per month, you can withdraw whenever you like, provided you don’t exceed one withdrawal per month. Going against these guidelines may usually attract penalties including losing accumulated interest.
- Fixed Deposit Account
A fixed deposit account is a special type of savings account that requires you to deposit a lump sum of money for a specific amount of time, usually referred to as tenure. Once you make the deposit, you cannot access the funds until the tenure has lapsed.
For instance, if you deposit Ksh1 million into a fixed deposit account with a tenure of 1 year, you will not have access to the funds until the 1 year tenure has lapsed. Some financial institutions do allow you to withdraw money from a fixed deposit account before its maturity, but this will come with penalties which is typically forfeiture of interest earned in the respective period.
Another thing to keep in mind when it comes to fixed deposit accounts is that you cannot add more money into the account until the end of the tenure. For instance, if you put Ksh1 million into a fixed deposit for a duration of 1 year, you cannot decide to add an extra Kshs100,000 into the account the following month.
While fixed deposit accounts are highly illiquid, they compensate for this by offering a fixed interest rate until the end of the tenure. Even in the event of interest rate fluctuations in the market, your specified interest rate is guaranteed.
- Target Savings Accounts
These are savings accounts that allow you to save money towards a specific target, such as the purchase of a house, education funds, saving for your children, saving for a holiday, and so on.
With target savings accounts, you set your savings targets with the financial institution providing the savings account, and then start making deposits into the account until you achieve your target. You will be restricted from making withdrawals from the account for any other purpose.
For instance, if you have a target savings account for the Christmas holidays, you’ll only be able to withdraw funds from the account during the Christmas holiday season.
Similarly, if you are saving for your kids, you’ll only be allowed to withdraw funds from this account once your kids reach the agreed upon age, say 18 years.
The beauty of target savings accounts is that they prevent you from misusing funds meant for a specific purpose.
Factors To Consider When Opening A Savings Account
Savings accounts from different financial institutions come with different terms and conditions, and not every one of them will be suitable for your needs and goals.
Therefore, before opening a savings account, there are some factors you need to take into consideration. These include:
What Are You Saving For?
The first thing you need to take into consideration is your savings goals. Why are you saving money? This will help you determine which kind of savings account works best for you.
If you are saving simply to build a nest egg that you can turn into in case of an emergency, or one that you can use for unspecified investment purposes in future, a regular savings account could work best for you, because it offers more liquidity of your funds.
If you are saving money to go towards a major expense, such as buying a car or taking your family on vacation, a target savings account often works better, because the money is less accessible. A target savings account also works when you are saving for retirement. You can request your bank to make these funds available to you once you reach retirement age.
If you are looking for a way to save money for a specified period of time and grow your funds during this period, a fixed deposit account is your best option, since fixed deposit accounts typically offer better interest rates compared to other types of savings accounts. Note, however, that this will differ from one financial institution to another.
What level of convenience are you looking for when it comes to accessing your funds?
Do you want to be able to access your savings online, or do you prefer only being able to withdraw your funds in person from a brick-and-mortar bank branch? Do you want a savings account that allows you to have an ATM card?
It’s good to note that convenience is not always a plus when it comes to savings accounts. The more convenient it is to access your savings, the more likely you are to spend the money on something unplanned.
However, if you have to go to the bank physically and stand in a queue before you can access your money, you’ll be less likely to go and withdraw money from your savings account unless it is absolutely necessary for you to do so.
Is There A Minimum Opening Deposit?
To open a savings account, some financial institutions will ask you to make a certain initial deposit. Generally, accounts with no minimum opening deposit are preferred, especially for beginners because you can open such accounts even if you don’t have any money at the time.
Is There A Minimum Interest Earning Balance?
Some financial institutions will require you to have a specified minimum balance before you can start earning interest from your savings. This minimum interest earning balance could be as low as zero, and sometimes, it could go as high as Ksh100,000.
When saving your money in a savings account, you definitely want this money to earn you some interest, so this is a very important consideration.
For instance, if a savings account has a minimum interest earning balance of Kshs100,000, and you intend to deposit Kshs 10,000 into the account every month, it will be close to a year before you start earning any interest on your savings.
In addition, if you withdraw some money from the account, leaving a balance of below Ksh100,000, you’ll stop earning interest on your savings until your balance gets to Ksh100,000 again.
Therefore, keeping other factors constant, it is more advisable to go for savings accounts with lower minimum interest earning balances, since this allows you to start earning interest on your savings much earlier.
However, note that some banks offer better interest rates for accounts with a higher minimum interest-earning balance which would then make them more attractive depending on the amounts you are planning on saving.
Another important consideration to keep in mind is the interest rate paid by the bank on savings accounts. The higher the interest rate, the more money you are going to have in your account when you decide to withdraw your savings.
Savings accounts in Kenya offer interest rates ranging from as low as 0.5% per annum to as high as 8% per annum. Keeping other factors constant, you should go for savings accounts that offer higher interest rates.
When looking at the interest rate offered by a savings account’ it’s also important to compare the interest rate to the inflation rate. For instance, the annual average inflation in Kenya between June 2020 and June 2021 was 5.35.
If someone deposited their money in a savings account with an interest rate of below 5.35, this would mean that their money is losing value faster than it is earning interest.
At the end of the year, the money would be worth less than it was when they made the deposit. It is therefore advisable to find a savings account that provides a higher interest rate than the average annual inflation rate.
How often are you allowed to withdraw from your savings account? Some financial institutions allow you to make unlimited withdrawals, while others only allow you to make 2 withdrawals in a year, with several other options in between.
When evaluating the withdrawal limit, take into consideration your needs, as well as your goals. For instance, if you are saving money for a specific purpose, you are better off going for a savings account with minimal allowed withdrawals.
If, on the other hand, you are just saving money that you might need to use at a moment’s notice, you are better off going for a savings account with unlimited withdrawals.
Note, however, that you need to be very disciplined when using a savings account with unlimited withdrawals, otherwise you’ll find it very hard to build any substantial savings.
Finally, when opening a savings account, it’s also important to look at the fees associated with operating the account. While financial institutions offer savings accounts for free in order to encourage more people to save, it is still important to check whether the institution you are considering has any other fees, such as withdrawal fees, overdraft fees, penalties for exceeding withdrawal limits, and so on. Generally, you should try to avoid fees as much as possible, since they eat into your interest earnings.
Savings accounts not only keep your money safe, they also allow it to grow from accrued interests, while at the same time helping keep you disciplined in your saving efforts.