Sat | Dec 3, 2016

Advisory Column: How to save, profitably

Published:Sunday | March 29, 2015 | 12:00 AM

QUESTION:

I am seeking advice on how to save. I currently save with a credit union, earning an interest of 6.0 per cent compounded monthly, but should I also have a USD (United States dollars ) savings account? The way I see it is, what I would pay to convert to USD would be more than converting from USD to JMD (Jamaican dollars) so, essentially, I would be losing, or I would have to keep saving until the selling rate eventually exceeds my current purchasing rate, provided the dollar continues to devalue.

What is the most profitable way to 'save' in US, a regu-lar savings account, or should I be looking at fixed deposits?

- Jay

FINANCIAL ADVISER: There are several reasons why people have US-dollar savings accounts, but that does not mean that you or any other person must have one. At the end of the day, you should have a good reason for having one.

Having a US-dollar savings account is one way of hedging against the devaluation of a local currency, in this case, the Jamaican dollar. This is, particularly helpful in Jamaica, which uses a high level of imported goods and services, which must be paid for in foreign currency. It is, therefore, one way of protecting purchasing power as devaluation causes the price of imports to increase.

Further, persons who have obligations which must be paid in US currency - school fees and business expenses, for example - find it helpful to hold US dollars. This makes it easier and quicker to pay when it is time to meet their commitments. It also removes the risk of higher costs in Jamaican dollar terms if they need to purchase US dollars in a market in which the Jamaican dollar is losing its value.

Additionally, Jamaicans who earn US currency, whether as consultants or businessmen and women, for example, may prefer to hold some of their earnings in US currency to meet future obligations or to save and invest.

Other persons may deposit their funds into US-dollar interest-earning accounts, or purchase US-dollar investment instruments because of the attractiveness of interest rates and promising return prospects on investment instruments.

Perhaps, you should determine why you would want to have a US-dollar account. From what you have described, it seems that you would want to hold funds in such an account for a short time. It is true that you would suffer a loss if you bought US dollars to deposit to your account and then sell them at a lower rate.

US-dollar account

The only prudent course that would be beneficial to you would be to keep your funds in that account until you are able to convert to Jamaican dollars at a rate that would not cause you to incur a loss. Should you hold the funds long enough, you would also earn some interest. In any case, those rates are also quite low. Holding your funds in a US-dollar account for a short time is hardly an option.

Generally, fixed deposit rates are higher than the savings rate. And whereas depositing to a savings account is flexible and is allowable for small sums, additions cannot be made on an ongoing basis to a fixed deposit account, and the required sums tend to be higher than what is required to be lodged into a savings account. Consider also that it is easier to withdraw from a savings account than from a fixed deposit account.

Before taking action, interrogate yourself regarding the reasons why you would want to save in US dollars. If you can identify a satisfactory reason, take action, but I would not recommend that you save in US currency or any other, for that matter, just because you believe it is something you should do.

By raising these questions, you have indicated that you are thinking about how you can improve the returns on your financial resources and are conscious of the need to diversify to manage risks. These are, indeed, positives that you can take as you plan for the future.

n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.

finviser.jm@gmail.com