Choosing an appropriate savings strategy

Saving money is necessary for financial well being. Savings come in handy on a rainy day, they provide a financial cushion for unforeseen contingencies. There is nothing worse than having an emergency in the home, be it an illness, bereavement and so on,

HOWEVER, for a lot of good reasons, saving is not easy. The principal reason most of us give is that saving money is impossible because income is low. Some claim that saving does not pay or in fact it is costly to save. Some are wary of the risks of saving money and putting it in a bank. All these are somewhat valid reasons, but on balance however, the benefits of having a sound personal savings plan will far outweigh any costs or perceived risks.

Level of income as a driver of the savings strategy

In our two earlier articles on saving, dubbed “Breaking barriers to saving”, we discussed various barriers to creating a national savings culture. Chief amongst the identified barriers were issues to do with psychological inhibitors or attitudes, where people are simply bored, or apathetic towards creating a base of personal savings. Some of the factors were economic, for example low incomes versus large expenditure needs with the result that people are failing to save and are instead falling more into debt.

However, busted two of these myths, the first by showing that low income is not a good enough reason not to save money, by demonstrating that saving can become a habit and a discipline that is not related to one’s level of income.

To develop a culture of personal saving, one needs to put away a portion of their income every month or some other regular interval, no matter how small. The principle is don’t consume everything you get in one income period. Save some of it.

These savings will build up over time. Secondly, we distinguished between saving being a long-term agenda and debt essentially being short term and identified that being in debt once in a while should be temporary and should not stop one from saving for the long haul.

That way your savings should grow over time throughout your working life, even if you occasionally fall into debt. When you eventually retire, your savings in the form of assets and accumulated cash savings can be put to work and generate income for you.

Therefore the question we try and answer today is “How does one choose an appropriate savings strategy?” Having chosen one, what financial instruments and products are available in the market to help sustain this strategy at minimum cost and maximum benefit for the consumers. These are two important elements of a successful saving strategy.

Which is the right savings account?

We have already highlighted that one’s income should not stop them from saving, the income level only helps one decide what strategy and products to pursue.

If one is a civil servant for example and his or her income is modest, there are appropriate banking products to help one save relatively small amounts and grow these into larger sums over time. However, care should be exercised when one gets into a bank to ask for savings products. Sometimes it becomes a costly affair when a customer orders and buys the wrong product. In the end they incur costs and charges that they should not have incurred. Most banks, when you ask for a bank account will in the first instance assume you need a transactional account.

This is an account that the customer will use to receive or make payments, withdraw funds and generally run their personal day to day financial activities.

These types of accounts are usually the ones were customers will also receive their salaries into. Now there are significant costs for a bank to process various transactions on behalf of a customer, be they withdrawals or payment requests, such accounts will therefore attract service charges and other transactions costs that end up eroding the customers balance over time.

To avoid this, banking customers are advised to seek fixed term savings accounts that pay a base line interest rate. These type of products will not result in a customer having less than they deposited in the first place. Most if not all banks in Zimbabwe will offer fixed deposit savings arrangements were the manner and number of withdrawals is contractually restricted over a certain period.

This also allows the bank to find an appropriate long term investment for the customer. These types of accounts are available for both low and high income earners.

Treasury Deposits, Treasury Bills and Bankers Acceptances

Customers with higher balances to save normally will have the option to invest directly with Treasury Departments of banking institutions. We use the term directly a bit loosely because the procedure normally involves calling ones branch manager or account manager, who can then facilitate the investment with the banks investment guru’s in the Treasury Department. These amounts are matched with Negotiable Certificates of Deposit, NCDs, Government Treasury Bills and Bankers Acceptances, which are loans to blue chip borrowers on a bank’s books that carry the bank’s guarantee.

These types of investments will normally attract higher rates of interest than ordinary deposits and the customer will benefit from this. There will usually be restrictions to the frequency and manner of withdrawals, including penalties for early redemption of the principal outside the agreement. This is usually because the bank will have “fixed” the client’s money in a investment that is long term in nature to meet the client’s return needs.

In conclusion therefore, saving should be and is a long term activity. This is the only way to grow ones savings. Irrespective of income, one should put away a small amount of money away every month and grow this over time into a sum large enough to buy a portion of Treasury Bills one day. This requires discipline, patience, and of course asking the right questions when one walks into their bank to ask for a “savings account.”

Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@ baz.org.zw or on numbers 04-744686 and 0772463008