How would you answer this question? Where to save money?
At least for some of you, the answers will be “In The Bank”. While the bank is one of the places where you can save money, in this low-interest environment, this may not be an ideal choice.
A bank was the only place where an ordinary person with money could go in the past. In this information era, there are much more areas that you can access with the touch of your fingertips.
If you are wondering how to save money when you can’t even find a way to earn money, please check out the link below.
What are the different savings options available?
First, let me list out some of the options that are available for you to save money.
In the interest of the personal-finance newbies and common citizens, I’m only including the low-risk options that are available to almost everyone.
Below are 6 common accounts or savings vehicles where you can park your idle money. And, underneath your pillow/cabinet is not one of the options.
Bank Savings account
A bank savings account is one of the common places where we all save money currently, and the reason for this is because of the trust we have in the bank, ease of access to the funds with a visit to the ATM or even by visiting the branch office.
With the help of internet banking portals and mobile apps, it has become the most convenient way we can access and move our funds.
Money in these accounts is for our short term financial needs like buying groceries, paying utility bills, rents, paying mortgage etc…
If you have too much money stashed into these savings accounts, you may want to consider moving it to an account that has a better interest rate yield.
It is usually very easy to open an account and deposit some cash into these accounts, interests earned on the money you deposited into these accounts are credited to your account regularly.
You can also have a sound sleep as most of the bank accounts are covered by insurance for up to a certain amount, depending on the country you are leaving in.
What it means is that if the bank goes bankrupt or the bankers run away with your money, there is a certain amount you will get back from this deposit insurance.
However, the major downside of this account is that the interest rate is lower, and also there some charges that the bank imposes if your withdrawals exceed a certain threshold/your account balances falls below a certain amount regularly.
If you are unaware of the details of the fees, or the insurance coverage on your deposit – do check out with your bank by checking their website/calling them.
High-Interest Savings Accounts
High-interest/High yield savings accounts are also offered by the traditional banks and new generation digital banks, these accounts usually provide an interest rate that is greater than the normal savings account.
But, for the account holder to get more interest, they need to perform some extra actions. Like, crediting the salary to this account, performing credit card transactions on the cards issued by the same bank as well as other qualifying transactions.
In essence, you do more banking with the bank and they will pay back a fraction of how much you have benefited the bank.
These accounts are also safer in the bank as these banks are regulated by different government authorities.
While these accounts earn more interest than the traditional savings account, they also come with additional terms and conditions, remember to read them carefully before you open these accounts and deposit your hard-earned money.
Time/Fixed Deposits
I’m sure that most of you have already heard of this fixed deposit that is offered by the traditional banks, as the name suggests, the money that goes into this account are locked for the term specified at the time of your deposit.
As it is your money, you are allowed to break the lock. however, the bank may not give you interest or only pay you a part of it due to the premature withdrawal.
This is most suited for the money that you do not need for a longer period, fixed deposits have different tenure depending on the bank and the amount you are putting in.
Compare the interest rates and the penalty for pre-maturely withdrawing the amount, before you hand your money to the banks.
Cash Management Accounts
Cash management accounts are mostly offered by digital banks or non-banking financial services providers. These works are similar to bank accounts except the fact that these are mostly accessed by logging in to the web portal of the institution or the mobile app.
They can provide you with a better rate because they are fully digital and do not have physical branches or costs associated with operating ATMs and other infrastructure.
As these are online services, do expect delays of days and even weeks when you are depositing money from your bank account to these accounts and withdrawing the money from these accounts to your bank account.
Similar to opening a bank account remember to read the terms and conditions of the provider of these accounts as well. These digital bangs will deploy your money into lower-risk money market funds for a shorter duration and the interest gained is distributed as an interest to your deposit amount.
Do remember that low risk does not mean – no risk.
Government Bonds
A Government Bond is a debt instrument backed by the government.
The government will be borrowing money from you to fund government initiatives like expanding the infrastructure of the country and for another government spending, In return to lending your money, you will be receiving an interest payment from the government periodically as a coupon payment.
Government bonds are considered low risk because as long as the government does not default on these payments, you are likely to get your coupon payment as well as the principal.
Again this is subject to which country you are living in, and the creditworthiness of your government, some countries defaulted on their bonds in the past.
Most of the government bonds are tax-free, this will encourage more people to lend the money to the government to gain tax benefits on their earned income.
Treasury Bills
Treasury Department of the government if the one issuing treasury bill or T-Bill, this is also a debt obligation by the government with a maturity of less than one year in most of the times.
These bills are sold in smaller denominations compared to the bonds, and the return rates are determined based on auctions that can be of competitive or non-competitive nature, the longer the duration of the bills, the better the interest rate.
The purpose of the government taking this debt is also to fund the development needs of the government. Since the bills are backed by the government and considered one of the safest – the interest rate is considered one of the lowest too.
Summary
I have summarized the options discussed above, based on the characteristics of their risk, return and ease of access. All these are subject to the country you are living in.
Therefore, please check your local bank interest rates as well as the government bond/ treasury bill interest rates before you consider what works the best for you.
Conclusion
If you are new to some of the options mentioned above, do read more about them from the internet.
This will give you a better idea of the specific details on the terms and conditions and different offerings in the country you live in.
Save safely and most importantly only in places you trust and know how it works.