Fixed deposit can be the perfect path to your saving plan

Saving can be a tough topic, especially in January when households in Kenya struggle with many financial obligations after a spending-free December.

Saving money is essential to building wealth and having a secure financial future. It allows you to escape the uncertainties of life and enjoy a quality life.

Systematically setting aside money can help you navigate many hurdles in life. It also ensures that your family has something to fall back on in case of an unfortunate event.

Although the saving culture in Kenya has grown mildly since 2009, it took a hit with the advent of Covid-19, which squeezed earnings.

This worsened last year as the globe navigated what economic experts describe as a near-financial depression.

The cost of living rose sharply, the shilling dropped to an all-time low against the dollar, and borrowing costs skyrocketed.

Global supply chain disruptions and increased geopolitical tensions exacerbated these issues. Most of these effects have been attributed to Russia-Ukraine attacks and the perennial conflict between Israel and Palestine.

The 2024 FinAccess Household Survey by the Central Bank of Kenya (CBK), the Kenya National Bureau of Statistics (KNBS), and the Financial Sector Deepening Trust Kenya highlighted a significant decline in savings habits.

According to the report, out of the total households surveyed, the trend shows a 7.9 per cent dip in the savings culture of Kenyans from 2021, the previous survey period, to date.

In real-figure terms, 68.1 per cent of the respondents noted having savings either in banks or mobile money and other informal savings. This is low compared to 74 per cent in 2021 and 69.9 per cent in 2019.

It is, therefore, no wonder that Kenya trails its regional peers in saving, with the average saving rate standing at 12 per cent, far below the continent's average of 17 per cent and the global rate of 23 per cent.

While any form of saving is encouraged, structural saving with defined goals and values is important.

I will examine the pros and cons of fixed deposit savings. This is when you put a lump sum in your bank for a fixed tenure at an agreed interest rate.

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, fixed deposits are not market-linked products, meaning the applicable interest rate is unaffected by market downturn. 

Here are some of the benefits of fixed deposits, which are offered by various financial institutions in the country.

Higher Interest Rates

Fixed deposits offer higher interest rates compared to savings accounts. This helps investors maximise their savings at low risk. Fixed deposit interest rates are calculated via the compound interest method, allowing depositors to earn higher returns upon fixed deposit maturity.

Rates of fixed deposits in 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 the 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 fixed deposit maturity - again, thanks to the power of compounding.

People have diverse income streams. Recognising this, Credit Bank in Kenya is one of the few institutions offering tailored products, such as call deposits placed for a minimum of a week at higher interest than current accounts.

The rate of interest is pegged to either the prevailing overnight (inter-bank) or the average REPO rate.

The rates applicable are market-driven and communicated before placements are made. The rate of interest is pegged to treasury bill rates plus premiums.

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 deposit investments are secured under the 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 money in case of any emergency. However, premature withdrawal of fixed deposits may incur penalty charges.

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, to meet immediate financial needs, secured against your savings.

The sooner you start saving for your goals, the more likely you are to achieve them. It is 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 and school fees.  

 - The writer is the Head of Business at Credit Bank