General Savings Products and their Features

We all save money for different reasons, however choosing the right savings products can be very helpful in managing your funds. Savings products are secure and liquid accounts offered by financial institutions in assisting the management of savings funds.

Banks and micro-finance have many savings products with different characteristics in term of interest rate, liquidity and other basic features. Therefore, it is important for one to choose the right product that would be suitable in reaching your financial goals.

Common Savings Products

Commercial banks, Micro-finances and Post office markets different savings products, however these products can generally be grouped into three major categories:

Current Account

Current account provides an easy method for withdrawing and depositing money. They generally do not offer interest and if offered, it is always lower than the savings account. Current accounts are very liquid as the account holder could withdraw the funds by issuing demand instrument like cheque. Hence it is also called demand account. Current account reduced the need to carry large amount of cash and very well suitable for businesses.

Savings Account

Savings accounts are designed to hold money that are not spent on current consumption. It earns interest higher than current account but often lower than fixed deposit and money market instruments like Treasury bill.

Savings accounts are also liquid, however most banks will only accept withdrawal by the account holder as cheque book are not issued on this type of account. It is suitable account for storing emergency funds.

Depending on the types of savings account, banks pays interest on monthly, quarterly or semi-annual basis. Most commercial banks also required you to maintain a minimum balance in your savings and some may even restrict the number of withdrawals in a month.

The generally weakness in operating savings and current account is inflation. Higher inflation means that your effective interest amount will be worse off. For example if banks are paying 6% interest on savings whiles the general inflation is reading at 10%; it means you are effectively losing 4% on saving account. This does not means you should close your savings account; however your investment funds should not stay long in a savings accounts.

Fixed deposit – Savings products

Fixed deposit allows you to place a specific amount with banks for a specific period of time at an agreed interest rate. You are not expected to access the funds during this agreed period.

You can still pre-liquidate the funds if you need to. However, banks could charge you by forfeiting up to 100% of the interest accrued (not the principal). The percentage charge generally depends on the outstanding days to maturity. For example if you fixed the funds for 90 days and pre-liquidate it by the 10^th day; you may lose all the interest accrued within these 10 days.

Unlike savings account, bank usually accept fixed deposit for a minimum period of one month. Additionally, the general minimum investment amount in fixed deposits is D20,000 and no maximum limit.

Are these Savings Products suitable for you?

Well, it depends on your savings goal and financial situation.

• Current account – Suitable for businesses as it help them issue cheque to their vendors. Current account is not a good savings product for individuals. Just receive your salary in current account and move it to the proper savings account.
• Savings Account – It is good keeping funds that will be needed within a short period such as weekly expenses or emergency funds.
• Fixed deposit – Funds needed within 2 months to a year could put into a fixed deposit. For example money saved to pay school in next academic year or to start building in the next few months.

Savings products for long term goals

The above 3 products are generally not suitable for long term goals. If you are savings to make use of the funds in the next three years and beyond, then Investment products may be suitable for you.

What influence the rate of return?

Interest rate on products is heavily influenced by 3 key factors:

1. Market and economic situation – If interest rates are higher in the market, expect the banks to offer you a higher rate as well. Inflation, foreign exchange, demand can all influence interest rates.
2. Principal Amount – The larger the principal amount placed in any savings product, the higher bank would offer a more competitive rate. For example D150,000 will attract higher interest rate than D50,000
3. Tenor of deposit – This refers to the number of days which the funds will be with the bank. 365 days will definitely attracts higher interest rate than a 90 day deposit; assuming both tenors offered the same principal amount.

Bankers have designed many savings products for people who aim to take control of their personal finances. If you are still not sure, check out my 10 reasons why everyone should start to save and let me know your thoughts.