So you've set up an automatic savings programme and you're finally building up that emergency fund, but where should you keep your savings so that it earns the most interest for you?
Luckily, there are many different savings vehicles available, but not all of them are appropriate for every situation. Most likely, you have already established a savings account at your local bank or sacco, and you may have this linked directly to your primary account to make transferring money to savings easy.
A savings account is the most convenient place to save money, but it might not be putting your money to work. When using a savings account, it is important to look at the interest rate. Depending on where you bank and what type of account you have, you could be earning anywhere from less than one per cent or a maximum of six per cent.
The problem is that many banks only provide high interest rates for significant balances over a certain amount. If you find you are only earning 0.65 per cent after accounting for inflation, you are actually losing purchasing power. The best thing about savings accounts is that they are completely liquid. This means you can access your money on very short notice.
You may also be able to go online and transfer money from the savings account to your current account, withdraw from an ATM or step into your local branch.
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What is right for you?
When it comes to savings, there isn’t a right or wrong answer. It ultimately depends on your needs. If you are using your savings for overdraft protection and want to have it available instantly in the event you need it, a savings account might be the most appropriate.
If you are saving for a large purchase or something predictable a few months or years down the road, you can probably find better rates with a fixed deposit, treasury bills, bonds, stocks or possibly a money market fund.
For many people, it comes down to having a mix of multiple savings vehicles. There will be part of an emergency fund in a savings account at the bank, possibly some cash in a money market fund, in an investment account or bonds stashed away for longer-term savings.
Whatever the case, you want to make sure your money is working for you as hard as it can.
