We are going to evaluate the following modern and some popular traditional savings vehicles against factors that a saver should take into consideration (liquidity and ease of exit) when choosing an appropriate savings vehicle.

• Mobile & Web Application driven saving vehicles and aggregators
• Savings Bank accounts
• Merry Go round Chamas
• SACCOs
• Bank deposits (Fixed & Call deposits)
• Treasury Bills (TBills)
• Money Market Funds

Earnings/Interest rates

Saving vehicles earning higher interest rates are obviously better than those earning low or zero interest rates. The interest rates earned should always be above the prevailing inflation rates. This will ensure that an investor does not lose value.

The minimum interest rate should be the risk free rate. The risk-free rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

In practice, the risk-free rate of return does not truly exist, as every investment carries at least a small amount of risk. The Government securities (Treasury Bills and Bonds) come closest to being risk free and are usually the benchmarks against which investors measure the returns against.

Treasury Bill (TBill) rates are an appropriate benchmark measure for short-term (3 to 12 months) fixed income assets while treasury bond rates benchmark against long term assets. The current prevailing TBill rate for 3 months is 9.74%. It indicates the lowest interest rate that your saving should be earning.

The merry Go round chamas usually pay no interest income on the money. If a saver is putting Kes. 1,000 a month so as to receive Kes. 12,000 by December. The Kes 12,000 will have lost value equivalent to the inflation rate(currently at 9.23%). That means that while the chama’s recipient in January 2020 received Kes. 12,000 which could buy goods worth Kes 12,000 at that point, the recipient who receives Kes. 12,000 in December 2020 can only buy equivalent goods worth Kes. 10,892. He would have lost 9.23% in value due to inflation.

Though savings bank accounts are meant to earn the depositors some interest on the saved amounts. This is not usually obvious as some banks pay, while others do not. The saver will need to engage his bank and find out if indeed there is any earnings on his savings or not. To push the banks to pay, it requires some negotiating power. Negotiating power is determined by the amount of money in your savings accounts. The lower the amount, the lower your power.

Bank Term Deposits, Treasury Bills, Mobile & Web Application driven saving vehicles and aggregators and Money Market Funds are all income earning saving vehicles. The only difference is how much each one of them earns.  For the four saving vehicles, one is able to tell in advance how much of interest rate range, each of the vehicles will pay. For bank term deposits, a saver is even able to negotiate in advance of doing the savings. For money market funds, a saver is able to choose between various fund managers for lucrative returns.

SACCOs, even though most of them are interest paying saving vehicles, they usually will declare the annual interest rate at the end of the period. That is because, they do their books at the end of the year and only declare dividends after audited accounts. The members, then, lack the privilege of being able to calculate and plan their savings growth. It would be very helpful if members of SACCOs are able to set performance targets and benchmarks to the SACCO management teams. This would ensure that the savers are not only assured of earning a minimum return on their savings but also be able to safeguard their savings from being eroded by inflation.

Saving Timelines

Different saving vehicles have different lifetimes. An investor will choose an appropriate vehicle which is aligned to his saving plan timeline. The saving timeline will be determined by the purpose of the funds. Where the purpose is a project like organizing for a wedding and all the accompanying expenses, then the intended time of the various events will determine the saving timelines. For such a purposes, the timeline may not exceed 24 months.

Where the purpose is putting a deposit for a mortgage or building a home, then the timeline may be extended to accommodate the increased amount that one may need. A saver may save for between 3 to 7 years depending on the amount required and the amount of saving per period.

When it is saving for retirement, then the saving timeline is longer. It will be over 8 years, depending on the age of the saver, his preferred time of retirement and whether he is self-employed or not.

The following are the popular demarcations of timelines;

• Short-term (0 to 24 months)
• Medium-term (3 to 7 years)
• Long-term (8 and above years)

Treasury bills, Mobile & Web Application driven saving vehicles and aggregators and bank deposits are short-term vehicles. In addition, they are term vehicles. That is to say that the saving period is pre-determined, you save for either 3,6,9 or 12 months. The longest you can save for the three vehicles is 12 months, however it is possible to renew your savings plan with a mobile & web application saving vehicle or purchase new treasury bills or bank deposits once the term expires.

Merry-Go-Round Chamas mostly have 12-months cycles and it is fairly easy to exit at the end of a cycle if one so wishes. Saving Bank accounts, SACCOS and Money Market Funds are more open ended saving vehicles. That is to say that one can save for as long as they wish. A saver can use them for their short-term, medium-term and long-term saving needs.

As a saver chooses an ideal saving vehicle, one of the major considerations should be determined by the rate of interest earnings in the saving vehicle. Where a vehicle’s interest rate is below the prevailing market interest rates, an investor should consider such vehicles for only the very short-term if at all.

The next consideration of how long a saver will keep their savings is safety and security of the savings. Where the risk is high or undetermined then a saver should not save money in this kind of a vehicle at all.

It is important for savers to keep doing a risk profiling of their different saving vehicles in order to manage their risks.  Some of the easy to read signs that show increased risk are;

• Higher returns than the market. When a vehicle starts having significantly higher returns than the market, then a saver needs to find out the reason for such. Higher returns always mean that the risk is higher, find out why your bank or money market fund is paying a higher return than the market. If a saver does not have an appetite for the increased risk, then the saver should exit.
• Decreased liquidity – if it starts taking longer to withdraw funds from a saving vehicle than it was initially, then a saver must evaluate the reason for the increased withdrawal timelines. Where liquidity becomes an issue then it is safer to exit as soon as one can. With compromised liquidity the saving vehicles are unlikely to take advantage of upcoming opportunities and at the same time are forced to sell profitable long term assets to provide liquidity, all the above resulting into decreased returns and high risk of default on obligations.

Article done by Peninah Kimani

CEO Givva Wealthtech