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Money Issues - Saving: Why and How to

  • Overview
  • Bank accounts
  • Savings clubs
  • How to choose

1) Overview

While the idea of putting aside money for a rainy day is appealing, in reality most of us find it hard to develop and stick to a responsible savings plan. Generally people who have worked for a long time and whose children are grown up and taken care of will find it easier to save than younger people. However no matter what age you are and how much money you earn it is still a very good idea to save what you can. While it may take a good deal of discipline and sacrifice for you to reach your personal savings goals, the financial and other benefits that can come from a well-thought-out and stuck-to savings plan far outweigh the short-term cutbacks that you may have to endure. Not only will you have achieved your goal regarding the money you will also have a sense of achievement and pride. See what this article from the World Wide Web has to say:

Why Save Money?

Emergencies:
If there's one certainty in life, it's that unexpected things can happen at any time. Whether it's a natural disaster, an unplanned illness, the loss of a job, or a bad investment, or the death of a relative, the financial effects of an emergency situation can be very extreme if you aren't properly prepared. A well established savings account can help prevent a financial crisis when these situations arise.

Debt Prevention:
The main reason that people get into debt (owe other people money) is because they make purchases that they can't afford. In these instances, they usually turn to credit cards (which charge high interest rates and are often hard to pay off). Also people can get desperate and borrow from  a micro-lender and as with credit cards, end up paying back much more than they originally borrowed. A well-funded savings account can allow you to purchase the items outright and avoid the pitfalls of borrowing money.

Planning for the Future:
Everyone has something that they are aiming for. Whether it's money to buy a new car, pay for an education, or fund an early retirement, or even buy someone a special present, many of the things that we want can end up costing a good deal of money. An efficient and disciplined savings plan can help you achieve those goals sooner and without the drawbacks of debt.

Adapted from:  http://www.mahalo.com/how-to-save-money

So what do you do with your hard won extra cash?

2) Bank Accounts

Every economically active person is concerned with (or should be) how best to manage his/her money.  To be economically active means that you earn and deal with money, no matter how small or large the amount may be.  Often people who do not earn much money feel that they do not need to open bank accounts but will keep their cash in a safe place.  They may think that bank accounts are only meant for people who earn a lot of money. As we shall see there are many good reasons to use banks, People who have never had a bank account may also feel unsure what is involved and are therefore either too nervous or embarrassed to go into a bank and discover what is available for them.

Let’s just do a quick Quiz to see where you stand in this regard:-

Do you:
  • Keep all of your cash in your pocket, purse, or drawer until you need it?
  • Borrow money against a future pay cheque or pay-packet from a micro-lender?
  • Not get accounts paid because you don't have time to go to the place you need to pay? 
  • Send money to friends or relatives through postal orders or money wiring services? 
(Adapted from:- The Beehive: Make it Easy site)

If you answered “Yes” to any of these questions then you need to read further to see why opening a bank account would be a very good idea; if you answered “No” to all these questions, you still need to read on to understand more about bank accounts and savings.

Although you may still not feel that you really need a bank account, let us just point out some important advantages to opening an account before we go on to look at the different types of accounts available:-

  • You establish a financial history and proof of successful bank use.
  • You have a secure place to keep and save your money.
  • You create a relationship with your bank that may make it possible to borrow money for a car, home, or an education.
  • You will find it easier and safer to send (transfer) money to dependants
  • You have a safe place into which your earnings can be paid rather than receiving cash – many employers in fact insist in you having a bank account
  • You get a Debit Card (explained below) which means you can go shopping and pay for items without carrying around money which is as we all know dangerous
  • You can withdraw money  from your account from ATM’s (explained below)
  • You can keep a check of exactly how much you are spending

 

2.1) Different types of individual Bank Accounts
So what exactly is a bank account and how does it work? Basically banks are financial institutions, which accept deposits; (money paid into accounts) make business loans, and offer various other services. Although we have said banks are places where you can keep your money safely we must remember that banks are commercial institutions or businesses, which means that they exist to make money themselves. When you open a bank account you may open one that allows you to earn interest. Interest is the money you earn on the money in your account. This will be very different from one type of account to another usually depending on how much money you have in your account and how quickly you can take it out of your account.  How can a business afford to “pay” you in the form of interest for letting them look after your money? They do this because they in turn lend money to big businesses and home owners who in turn have to pay the bank interest 

 2.2)  Basic Bank Account
A bank account as we have already discussed, is a safe and practical place to keep your money. When you open a bank account what you are actually doing is entering into an agreement with the bank. The agreement is that you give your money to the bank to look after, and it then provides you with easy and quick ways to take your money as you need it. This is the most basic definition of a bank account. Now we will look at the different types of accounts banks offer.

2.3) Savings Account
A  Savings Account is an account in which you keep your money and earn some interest. The amount of interest you get will depend on the type of Savings Account you have opened and will be based on the amount of money you have in your account, which is known as your balance.  You can still access the money if you need to use it. You will usually get an ATM (Automated Teller Machine) or Debit Card to use for transactions on this account. A Debit Card is a card that you can use to buy items with. When it is put through a computerised machine by the seller the amount owing for the item will be taken off your account. This is provided you have enough money in your account to cover the cost. You will then be given a slip of paper to sign that shows the amount and date and time of the transaction.  The advantage as mentioned earlier is that you do not have to carry around a lot of cash.

An ATM card is inserted into an ATM machine and once you have entered your Personal Identity Number (PIN) you will enter the amount of cash you want to withdraw. The computerised machine then processes your request and the money is available for you – again providing you have sufficient funds to cover the amount requested.  For security reasons you should never give your PIN to anybody else – even bank employees will never ask you for your PIN. It is unique to you and you should try to learn the five or six digit number off by heart so that it is also never written down where anyone else can see it.  In a Savings Account you always have to have some money in your account – in other words have a positive balance. Different Banks and different types of Savings Accounts will need a different minimum amount in your account.

Credit Cards

If you have a regular and steady income, you can apply for a Credit Card. The bank or financial institution will decide on the amount of credit (money in advance) they will give you. This means in effect that the bank says “We will allow you to have access to (say) R10 000 of our money to spend as you wish.” Sound too good to be true? The bank will indeed allow you to spend this money which is actually a type of a loan, but you will be charged a very high rate of interest on whatever money you spend and thus owe them.  The Credit Card allows you to buy up to your limit but a certain percentage (between 5 – 10% of the amount owing) will automatically be taken off your Savings or Current Account every month. The best way to handle a Credit Card is to pay it off in full every month if possible, or when you get extra income. It is a very useful but expensive account to have, so only have a Credit Card if you are guaranteed a reasonable regular income and are very disciplined with money.

2.4) Cheque or Current Account:
In this type of account, you will get a cheque book and will be able to pay accounts with cheques. Cheques should obviously not be made out for amounts that are greater than the balance (amount of money) in your account.. Cheque accounts usually pay less interest than savings accounts, and have higher bank charges. You will be charged for each cheque that you use, so try to use them only for larger amounts of money.  When you make out a cheque the seller has to trust that you have sufficient money in your account to cover the amount of the cheque. For this reason many sellers prefer cash or Debit Cards and with Internet Banking now also available cheques are being used less and less.

One advantage of a cheque account is that you can apply for an overdraft. An overdraft is like a personal loan from the bank. The size of overdraft that the bank will grant you will usually depend on the wages you earn and pay into your account every month.  An overdraft allows you to draw more money from your account than you actually have, so that you go into a negative balance. You have to pay the bank high rates of interest for this, so it is best to avoid having an overdraft unless you really need the money and know you can pay it back really soon.

2.5) Notice Deposit Accounts:
These are accounts where you must deposit a certain minimum amount to open a notice account, and you will have to give 32 or 60 days advance notice if you want to draw from this account. These are good accounts for short-term saving because you can't just draw the money out easily and you earn higher interest than you do on ordinary Savings Accounts when you can have access to your money immediately.

2.6) Fixed Deposit Accounts:
These types of accounts also need a minimum opening balance. You will only be able to withdraw the money after a fixed period, which will usually vary between a year and two years. These accounts will earn you the highest rate of interest generally which makes this a good choice if you are saving for a specific item.

3) Savings Clubs

Stokvels or savings clubs have been around in South Africa for many years. They are a good way for people to help motivate each other to save, and many stokvels are like social clubs where members also help each other in ways other than with money.

A basic stokvel is very simple. There are usually twelve or more members, and each member contributes a certain amount each month. This can be anything from R50 to R1, 000, depending on everyone’s income. Each month, it is a different member’s turn to receive the money. So, if you belong to a stokvel with twelve members who each contribute R500 a month, then once a year you will receive a R6,000 payout. You are motivated to save because the other members will know if you haven’t paid your contribution, and also because the regular meetings are a reminder of what you will gain when it is your turn.

Some stokvels save for Christmas; all the money each month goes into a savings account and at the end of the year everyone gets their share. If the members choose the right savings account they each benefit from the interest gained as well. Other stokvels have many more members, and meet more often.

(From: http://durban.thebeehive.org/Templates/Money/Level3Image.aspx?PageId=1.194.350.8183)

4) How to choose?

Whether you want to open a personal bank account or belong to a stokvel, at some point you are going to have to choose which bank you are going to use and what type of account you, or your savings’ club, is going to choose.

Below is a list of things to consider when choosing a Savings Account:-

Minimum Balance Requirements: Some savings accounts require you to keep a minimum balance in your account at all times and will charge you if you go below that amount. Make sure that if that is the type of account you want you have enough money to cover that balance at all times.

Bank Charges: One of the ways that banks make money is that they charge fees for various transactions. Some banks offer "free" banking if you maintain a high enough balance at all times  - the amount required will vary from bank to bank. Other types of accounts have a fixed monthly cost for a certain number of transactions., but will charge heavily for any transactions over and above that number, so you need to carefully monitor your transactions. (Any activity involving your account is known as a transaction).

Interest Rates: As discussed above, the interest rates that are offered by different savings accounts can vary widely. Make sure to compare the interest rates offered by different types of accounts and by different banks. banks to find the best interest rates.

Access to Your Money: As we saw above, different banks and accounts have various rules when it comes to how you can access the money in your savings account. This means that it is important to be clear about your financial needs and  to consider how often you may need to access your money.

HAPPY SAVING!!!