Knowing how to choose the best savings instrument for your needs, is one of the pillars of financial literacy.
You’ve decided to save money, reworked your personal budget to include an amount for saving, and you are ready to put a debit order in place so that you can save automatically. The only thing holding you back, is deciding where to put your money. Here is a look at your options.
There are three main types of bank savings accounts:
- With a call account your money can be withdrawn immediately or at very short notice – usually not more than 24 hours. The interest you earn is generally quite low and it fluctuates depending on how much money is in your account. It is a good account in which to save for emergencies and financial distress events.
- With fixed deposits, your money is tied up for a specified period of time, which can range from one month to five years. The interest you earn is usually fixed upfront for the full term, and is higher the longer you commit to leaving your money in the bank. You earn better interest with a fixed deposit than with a call account, but you can only withdraw your money at the end of the savings period.
- Linked deposits are fixed deposits where interest rates can increase during your savings term, but there is a guaranteed minimum.
- With notice deposits your money stays in the savings account until you give notice that you want to withdraw it. The notice period is usually 32 days. The longer the notice period, the higher the interest rate. It is sometimes possible to shorten the notice period, but you will pay a penalty for doing so.
Different banks have different minimum amounts you need to open a savings account, but the amounts are usually quite low. However, the interest you earn depends largely on how much you deposit and for how long you leave the funds in your savings account.
Low-income families have been saving through stokvels and burial societies for a long time. The power of these institutions has in recent times been recognised by government programmes that. Each stokvel determines the minimum amount that members have to save each month. The most important element of the stokvel model is trust. Members have to trust each other to keep contributing, especially after having received the cash.
Where stokvel members have agreed to save for a bigger goal, they can deposit their monthly contributions into a joint savings account. This gives them the benefit of earning interest on their pooled contributions.
Another non-banking savings vehicle is credit unions, which are groups of people with a certain common bond who get together to start a savings and loans scheme. As with stokvels, a strong sense of trust is important as loans are made available to members after a predetermined period of saving.
Tax-free savings account (TFSA)
You can save R36 000 per year in a TFSA, and up to R500 000 over your lifetime.
You don’t pay tax on any interest earned or withdrawals made, unlike with a regular savings account. However, when you withdraw money from your TFSA, the amount is deducted from your lifetime contribution limit. If, for example, you have saved R100 000 in your TFSA and you withdraw the full amount, you will only have R400 000 left of your lifetime contribution limit.
Similarly, your annual limit remains the same, whether or not you withdraw any money. For example, if you invested R36 000 in a TFSA on 1 March 2020 (the start of the tax year) and decide to withdraw R15 000 after six months, you will not be able to contribute to your TFSA again until the start of the new tax year.
It is best to view your TFSA as a long-term savings vehicle to get the most benefit from it.
When choosing your savings instrument, look at the pros and cons of each option in view of your personal needs and circumstances. Financial literacy is a cornerstone of financial wellness, so make sure you learn about savings options before you commit.
The good news is that you don’t have to figure it out on your own. Bayport’s Information Centre (click here) contains all the information and tools you need to improve your financial literacy and learn how to build financial wellness.