To make saving easier you should try to automate it by either setting up a debit order or stop order into an appropriate vehicle. That way you don’t have to think about saving and it happens automatically.
A savings vehicle is a way of saving money. The following are types of savings vehicles:
MONEY BOX
This is a high-risk way to save money. It can easily be stolen or destroyed. Your money will not earn interest and you might be tempted to use it.
SAVINGS CLUB OR MUKANDO
These are popular methods of saving money. Members usually know and trust one another. Each member contributes a certain amount each month. Members encourage each other so it becomes easier to save. Members take turns to get a lumpsum. No interest is paid on the savings. These clubs usually run on a trust basis with little or no written contracts. There is no protection if your money is stolen.
SAVINGS ACCOUNT
These are relatively easy to open, and you can access your savings by withdrawing from an ATM using a card. Most banks require a minimum amount to be kept in the account. Savings accounts usually have low interest rates.
TAX-FREE SAVINGS ACCOUNT
A tax-free savings account is an investment account that does not charge taxes on contributions, interest earned, dividends or capital gains and you can withdraw from it through the transactional account.
NOTICE DEPOSITS
A notice deposit is a way of saving in which you can invest a lumpsum deposit or make adhoc or monthly deposits. You earn interest at competitive rates and need to adhere to the 32-day notice period before you can withdraw money.
FIXED DEPOSIT
You can deposit a lump sum into a fixed deposit account in which your money will not be accessible for an agreed time period (one month to five years). Interest rates on fixed deposits are usually also pre-determined for the full period. The longer your money remains in the account, the higher the interest rate that you will earn.
UNIT TRUSTS
A unit trust, or mutual fund, is a portfolio of investments managed by a fund manager according to specific objectives. As more people invest in a unit trust, more units are created. Your money is pooled with other people’s money and is used to buy and sell shares and bonds. The total value of the pool of money is divided by the number of units owned by the investors. The value of the unit trusts should increase over time as interest and profits from the shares are added. Growth is not guaranteed, and your money could decrease in value. These are a longer-term investment and are flexible as you can change the amount you save at any time and you can buy or sell your units whenever you want to.
SHARES
You can buy shares in a company or corporation and be entitled to payouts of the profits in the form of dividends. The size of the dividend will depend on how many shares you own, the dividend that is declared and the value of the shares.
BONDS
Bonds are debt investments in which an investor lends money to organizations in return for full payment with interest over a defined period of time.
RETIREMENT ANNUITIES (RAs)
You can take out a retirement annuity with an insurance company. A fund is the policyholder and you become a member of the fund. This is similar to a pension or provident fund that is set up by an employer.
An amount is paid into the RA and the company invests it and makes it grow for you. You can only get money from the RA from the age of 55 or if you cannot work because of ill-health. You can also access money before retirement but only in limited circumstances, for example emigration.
On retirement you can take up to one third of the value of your fund as a lump sum and must use at least two thirds to purchase an annuity (i.e. a regular income, which is taxable). You don’t have to take a lump sum and can use the full fund value to purchase an annuity. Depending on the circumstances and your fund value, you can take the full value as a lump sum. The lump sum is taxable.
PENSION FUND
A pension fund provides for the payment of a pension on retirement. It receives contributions from members while they are employed. Members can get up to a third of the pension amount as a lump sum on retirement and the remaining two thirds must be used to purchase a monthly income. Just like an RA, members are not compelled to take a lump sum and can use the full value to purchase an income. If the total pension amount is lower than a certain amount, the member may take the full amount in cash at retirement. These amounts are taxed in the same way as described under retirement annuities. Members can only withdraw from the fund earlier than retirement upon resignation or retrenchment.
PROVIDENT FUND
A provident fund is similar to a pension fund, but you are not limited to only take up to one third in cash. You may opt to take the full amount as a lump sum or a portion of the full value on retirement and use the remaining money as a regular income or could use the full value to purchase an income.
ENDOWMENT POLICIES
You can take an endowment policy with an insurance company. This type of saving is for a fixed period of five, ten or more years. You pay an amount into this policy and at the end of the period, you will be paid a lump sum. There may be penalties if you stop the policy before the end of its term. Your savings may grow at a higher rate than in a normal savings or interest-bearing account.
Saving for the future or your child’s education are long-term savings goals. This means that you will save your money monthly for a duration of five years or more. Depending on the savings vehicle you use, the longer you leave it the more your money will grow.
If you don’t have an emergency fund or discretionary savings, you might withdraw from your long-term savings. There are also restrictions on how much you would be able to withdraw. Let’s see what will happen if you withdraw your money early.