What are Savings
Savings is that money that you set a side for your future use.Savings can be a portion of your current income or a flow of resources accumulated in investing those savings over a certain period of time.
Nowadays with technology,its easy to open and operate your high yield savings account wherever you are.
High-yield savings accounts pay more in interest than the normal savings accounts which actually don’t pay interest.
In Kenya the interest rates range from (0.5-15) % depending on the type of bank you choose to open your savings account with.
The commercial banks weighted average interest rates on savings was as at 3.55 as at May 2023.
For maximum returns you can always apply technology to shop across the bank networks that offer attractive interest rate even if your salary account is in another bank and you can actually do transfers online.
Because of savings relation with investment, you not only benefit as an individual in building wealth but you also help your country grow economically.
Your savings therefore can be in form of bank deposit increments, retirement plans, trust funds, building emergency funds etc.
What Are The Benefits of Saving
- Your feelings of financial security and peace of mind increases.
- You live a debt free live
- You can use your savings to invest and achieve your long term financial goals
- To better your retirement
- To have emergency funds for your rainy days
Saving is important in that since you have your emergency funds in place and also is a source of capital for your investment.
Basing on your current financial situation, your preference for your future over your present consumption will determine how you save. This therefore calls for sacrifice and discipline to achieve your goal.
Annual Interest rate, how often you can access your money in a year, minimum operating balance, initial deposit are some of factors to consider when opening a high yield savings account
Your money will always be safe with high yielding savings accounts since the deposits are insured by the Kenya deposit insurance corporation in case your bank fails.
The Bible on Saving;
1st Corinthians 16/2(New International Version)
On the first day of every week, each one of you should set aside a sum of money in keeping with his income, saving it up, so that when I come no collections will have to be made.
Just as Paul wanted the money from Corinthians to be ready and be of a suitable amount for the purpose so should be our intention for having a saving to build wealth.
We have to make a purposeful effort to save so as to achieve our goals for whichever reason.
How to Open Your High-Yield Savings Account
You can easily compare interest rates and terms offered by banks across and open your desired account online.
The requirements may include;
- Your national identity card,
- valid passport,
- KRA pin(personal identification number)
- a signature specimen
How To Operate Your High-Yield Savings Account
These will now largely depend on your financial goal and your budget.
Different goals will call for different saving strategies that will serve their purpose well.
Savings for building a home will require some large amounts so as to attract significant amount from the compounded interest as compared to savings for child’s college education.
But still even if you already have an account with one bank, you can still operate several accounts that have different goal plans with the same bank.
Some banks will allow you to get your savings in loans.
Here Is What To Look For When Opening Your High Yield Savings Account.
a)Annual Interest Rates
Get to know their annual rate interest and their payable frequencies if, monthly, quarterly etc
Since it’s a free market, interest rates will vary from one bank to another and more so they can fluctuate at any time.
The bank reserves the rights and discretion to change the rates at any given time.
A bank may as well decide to run a promotion to woo customers so be sure to get in details the duration of the promo and if it can help you boost earnings for your goal.
Also to look for is the minimum account balance threshold that attracts interest.
b)The Amount You Need To Open Savings Account.
Amount varies across the banks.
You may choose the amount you feel that will actually give maximum returns basing on the financial goal you want to achieve.
c)Monthly Maintenance/Ledger Fee
Most savings accounts do not have maintenance fees as at now.
You are able to manage your account online and on mobile banking.
d)Minimum Operating Requirements For The Savings Account
Some banks have minimum operating balances while others do not have.
Note that even if you may be having a minimum operating balance, it may not attract interest because it may not meet the account balance threshold that attracts interest.
d)Access To Your Money
Putting in mind there may be a higher rate of inflation; you may consider withdrawing your cash and doing some investment.
It’s good to know the penalty fee you will incur when you withdraw past your limit since the withdrawals are always capped to a certain extend.
Most banks will give a free withdrawal either monthly or quarterly i.e. four withdrawals in a year.
In most cases only over the counter withdrawal option is given for limited access to encourage saving and experience the power of compounding interest.
Note that income earned on interest here is taxable.
e)How You Can Deposit Money to the Savings Account
Every bank has its unique high yielding savings account for its target customer.
While some may encourage online or mobile banking, others may ask a client to determine the amount they want to be transferred automatically from their normal account and added to their savings account on the agreed date.
Additional deposits can also be made anytime and the funds accumulated to earn high interest thus earning maximum returns on your savings.
f)Compounding Method Frequency
When accumulated interest is periodically added to your principal, and then it begins earning interest again, then that compound interest.
Since banks use your deposits to lend, they pay you an interest in exchange to the money you have given them to hold.
Get to know if the interest is calculated daily on the available balance or otherwise to see the chances of your savings amount being increased faster.
The banks mode of operation will allow you to reinvest your interest to maximize the benefit of compounded interest.
Other banks may even offer an extra 1% interest if you did not withdraw any amount of your money over a 12 month period length.
Let’s Understand How Compounding Frequency Works On Your Savings.
Compound Interest Formula
A=the future value of your investment that includes interest earned
P=the principal balance (the amount you start with)
r=the annual interest rate before compounding (in decimal)
n=the number of compounding periods in a year (i.e. 365 days for daily.12 months for monthly etc.)
t=time in years
Depositing ksh 100,000 into a high yielding savings account that earns you annual interest of 8%.how much are expected to earn at the end of a period of 5 years….
From A=P (1+r/n) ^nt
Principal balance [P]=100,000
Annual interest rate [r] =8 %( 0.08)
Number of Compounding per year [n] =1
Time in years [t] =5 years
We will therefore have;
A=100000(1+0.08/1) ^ (1*5)
Future value [A] =Ksh 146,932.80
This means over a period of 5 years,
Your savings will have grown by ksh 46, 932.80
What if you were to compound daily or quarterly?
Principal balance, [P] =100000
Annual interest rate, [r] =0.08
Number of Compounding per year, [n] =365
Time in years, [t] =5 years
A=100000(1+0.08/365) ^ (365*5)
Future value [A] = Ksh 149,175.9
Your savings will have grown in value by Ksh. 49,175.9
Principal balance [P] =100000
Annual interest rate[r] =0.08
Number of Compounding per year [n] =4
Time in years[t] =5 years
A=100,000(1+0.08/4) ^ (4*5)
Your Future value [A] = Ksh 148,594.7
Your money will have grown by Ksh 48,594.7 in quarterly compounding
From the above workings it clear that the compounding method frequency really matters.
The more the interest is compounded the higher the returns.
Shop for a bank that will give the maximum potential of benefiting from the compounding interest for your savings
How You Can Take Advantage of Compound Interest To Increase Your Savings Return
- Start saving early
- Choose a bank whose compounding method frequency is done more often
- Hold your savings as long as possible to reap maximum returns
- Go for higher annual interest rates which tend to be high yielding
- Increase your deposits more often
“Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t … pays it.”
Saving is important in that your feelings of financial security and peace of mind increases since you have your emergency funds in place and also is a source of capital for your investment.
Your savings will grow when you put your money in a high yield savings account as compared to the normal account.
In order to experience the power of compounding interest you need to shop for a bank that offers maximum returns by compounding your interest more often.
Your savings will be safe since there is insurance thus it is a low risk investment that fetches low returns as compared to investing in stocks.
“The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind.” – T.T. Munger