Getting better value from your savings
Oran A.Hall, Personal Financial Advisor
At December 31, 2013, savings deposits of $224.565 billion accounted for 46 per cent of total deposits in the commercial-banking system according to the Bank of Jamaica.
Savings accounts are still popular because they are liquid in that they are easily convertible to cash as account holders can withdraw funds from them easily and quickly without giving notice to the bank.
Additionally, given the spread of commercial banks across the country, they are easily accessible, which facilitates the development of a culture of savings. Savings deposits constitute one type of financial instrument that qualifies for deposit insurance, which has a limit of $600,000 per account per financial institution.
To the commercial banks, they are a steady, dependable and reliable source of low-cost funds. To the extent that the banks use these deposits the best way they can to earn income - for instance, by lending - they are doing what their owners expect.
From the point of view of personal financial planning, are savers, who are the owners of those deposits, doing what is expected of them?
Let us look at the passbook savings rate of two commercial banks. For amounts of $50,000 to $199,999, one bank pays 0.1 per cent and the other 0.15 per cent. For $250,000 to $499,999, the rates are 0.45 per cent and 0.50 per cent and for amounts of $500, 000 to $1 million, each bank pays 0.6 per cent. The interest earned is subject to withholding tax of 25 per cent.
Savings accounts are absolutely necessary, but they are not the most suitable medium for long-term savings. In the interest of improving their returns, savers need to take a more aggressive stance in managing their money.
Savings accounts make it easier for savers to accumulate funds consistently over time, but they should give serious consideration to more attractive options when placing funds that will not be required in the short term or for emergencies.
But even when funds will be required in the short to medium term, there is a case for taking advantage of higher rates on other instruments such as fixed deposits or Bank of Jamaica instruments such as treasury bills.
Moving funds around can be quite inconvenient, particularly if it requires savers to move funds between institutions, and there is the added challenge that savers face - in many instances, the difference between savings rates and fixed deposit rates is not significant.
For the same two deposit-taking institutions mentioned above, sums of $50,000 to $249,999 earn one per cent and 0.75 per cent for 30 days and 1.25 per cent and one per cent for 365 days.
Sums of $500,000 to $999,999 earn 1.25 per cent and 2.3 per cent for 30 days and 1.75 per cent and 2.45 per cent for 365 days, respectively.
The rates get better as the amounts increase; one institution, for instance, offers 4.5 per cent for amounts over $2,000,000 for 30 days and 4.85 per cent for 365 days. It is clear that size matters.
Another way to earn better rates, as I have been suggesting, is to invest in unit trusts, which returned yields on money market funds of 4.75 per cent to 5.92 per cent over the past year. Those investing in longer-term interest-earning securities yielded between 5.51 per cent and 8.04 per cent. This option would be particularly attractive to smaller savers as unit trusts do not reward investors on the basis of the size of their investment. They also have the advantage of being quite liquid.
Unit trusts are able to invest in treasury bills and other instruments that most savers may be challenged to access. We can expect to see them becoming more commonplace and more accessible in light of developments in the market. In fact, the two largest commercial banks count unit trusts among their subsidiaries.
Savers and investors can no longer be satisfied with the little knowledge they have. The marketplace is developing at a steady pace, and each person has a responsibility to know what is happening in the market and how to respond.
There is a great need for more financial education to empower the public to make appropriate financial decisions. Financial institutions, employers, the Church and community groups, as well as educational institutions and regulatory bodies have a critical role to play.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free personal financial planning advice and counsel. Email: firstname.lastname@example.org.