Saving can be a tough topic, especially in January, when households in Kenya are struggling with a myriad of financial obligations after the December spending spree. However, this topic is a necessary challenge as people plan for the year ahead.
Saving money is one of the essential aspects of building wealth and having a secure financial future. Saving money gives you a way out of the uncertainties of life and provides you with an opportunity to enjoy a quality life.
While any form of saving is encouraged, structural saving with defined goals and value is important. In this article, I will look at the pro and cons of fixed deposits savings.
This is when you put a lump sum in your bank for a fixed tenure at an agreed rate of interest. At the end of the tenure, you receive the amount you have invested plus compound interest. Fixed deposits are also called term deposits.
They are considered the most preferred investment choice since they are secured and guaranteed returns. Additionally, they are not market-linked products, meaning the applicable interest rate is unaffected by market downturn.
Some of the benefits include;
Higher interest rates- Fixed deposits offer higher interest rates compared to savings accounts. This helps investors maximise their savings at low risk. Fixed deposits interest rates are calculated via the compound interest method, allowing depositors to earn higher returns upon fixed deposits maturity.
Ratesin Kenya reached a 24-year high last year, with cash-rich firms and high net worth depositors earning an average of 10.1 per cent, according to data by the Central Bank of Kenya (CBK). This was the first double figure since 2000s.
Flexible deposit tenure - Fixed deposits offer a wide range of investment periods, from as short as seven days to as long as 10 years. You can opt for short-term fixed deposits if you have short-term goals like buying a car or vacationing. However, staying invested for the long-term can help you fetch higher returns at the time of maturity - again, thanks to the power of compounding.
Minimal-risk investments - Fixed deposits carry minimum risk. They are not market-linked products like mutual funds. The interest remains fixed throughout the deposit tenure completely unaffected by market volatility. Additionally, fixed deposits investments are secured under Deposit Insurance Act.
Convenient access to funds - Fixed deposits offer better liquidity options compared to equity-linked saving schemes, Money Market Funds, Saccos and a few other small saving schemes. You can withdraw your deposit amount from fixed deposits in case of any emergency. However, premature withdrawal may incur penalty charges.
The sooner you start saving for your goals, the more likely you are to achieve them.
For non-callable fixed deposits, you cannot withdraw the amount before the maturity period. That said, there could be certain specific situations where the bank may allow you to withdraw funds.
For instance, fixed deposits investors can access overdraft facilities to meet immediate financial needs, secured against their fixed deposit savings.
The sooner you start saving for your goals, the more likely you are to achieve them. It's important to list your various goals and develop savings strategies for both short-term goals and long-term goals such as building a retirement home, starting a business, wedding, school fees.
The writer is the Head of Business, Credit Bank PLC.
