Many confuse saving and investing, but both are equally important in achieving the common goal of financial freedom. Gaining a better understanding of both these financial strategies will allow you to personally decide on whether it’s appropriate to invest money, to save that money or even do both. In conjunction with FEN Network and Global Money Week 2022, this article will explore what saving is, and give strategies which we hope you find useful for your journey in achieving financial freedom. Stay tuned for our other article, where we discuss investing in the same detail!
What is Saving?
Essentially, saving means putting aside your money to use in the near future. Instead of jumping at the chance to spend your entire paycheck on unnecessary expenses, you hold back and set aside a portion of that hard-earned money into a savings account. Some people may employ a strict budgeting technique and divide their monthly after-tax income into three major spending categories. This is called the 50/30/20 budget rule where 50% of your salary is spent on necessities, 30% is for leisure spending, and the remaining 20% goes towards savings.
Saving is a good financial strategy if you require money quickly and is often considered the safer route as the money in your bank account will never decrease unless you withdraw funds. The ultimate aim of saving is to have those funds readily available and easily accessible for future use. If you are saving towards a particular short-term goal, such as putting aside money for the down payment of a car or a house or saving for a holiday you have always been dreaming to go on, you would then target a specific amount to save each month to reach that goal of yours. Alternatively, you may be building a savings pot to protect yourself from any unexpected financial emergencies.
A rule of thumb is that saving should typically be for short-term financial goals. Although it is regarded as one of the safest forms of investment due to its minimal risk, interest rates are usually low when money is deposited in a savings account. This would cause the returns you receive on your savings to be low as well, and it might not be the best possible scenario to allow your money to grow quickly. Over time, the money you set aside for savings may lose purchasing power as the rate of inflation rises, reducing the value of your savings and the interest you earn.
(source: http://www.swanlowpark.co.uk )
The graph above is an illustration of how average bank interest rates consistently track below inflation. This suggests that for people who do not invest their money, the value of their savings, or ‘rainy day funds’, is declining in real terms. Basically, the money you set aside now may buy you less items than it did previously. With the same RM100, 5 years later, your basket can buy less goods.
How do Saving Accounts work?
A savings account is a type of bank account that allows you to deposit and withdraw money freely without incurring any penalties, and receive interest on your deposits. Certain banks have a tier system where different interest rates are offered based on the amount of your deposit.
For instance, if you own a savings account with an annual interest rate of 1% and deposit RM10,000 at the beginning of the year, you will earn an interest of RM100 at the end of the year, provided the RM10,000 in the account remains unchanged throughout the year. This is generally a straightforward interest calculation.
The interest rate for basic savings accounts are low (mostly below 1%), with high-yield savings accounts providing better rates. Although savings accounts are considered to be an incentive offered by banks to keep you as a loyal customer, the interest rates are not high enough to be viewed as a real investment option.
There are several accounts that offer better interest rates for higher-interest savings accounts, but it must be noted that there is a list of eligibility requirements one has to meet before applying for a high interest savings account.
Aside from requiring a high minimum deposit to create an account, you just need to consistently maintain a minimum balance to receive a high interest, which is normally greater than RM10,000. Most banks will expect you to do more than just save, they will also want you to spend a certain amount of money from that account monthly. ‘Save, Pay, Spend’ is the overarching concept here. This is why it’s unlikely for most people to qualify for high interest right away, resulting in a loss of prospective interest from the beginning.
The table below compares high-yield interest savings accounts in Malaysia and the eligibility requirements needed to receive the maximum interest rate.
|Savings Account||Maximum Interest Rate||Minimum Conditions|
|Standard Chartered Privilege $aver||0.05% – 4.30% p.a.||● Deposit RM3,000 monthly
● Spend RM1,000 on your credit card monthly
● Make at least five retail transactions on your debit card monthly
● Invest or insure at least RM30,000 during the month
|RHB Smart Account||0.05% – 2.85% p.a.||● Save RM2,000 monthly
● Pay three bills online monthly
● Spend a minimum of RM1,000 with your credit or debit card monthly
|UOB Stash Account||0.05% – 2.30% p.a.||● Maintain a balance above RM100,000|
|Hong Leong Bank Pay & Save Account||0% – 2.25% p.a.||● Deposit at least RM2,000 in a single transaction monthly for three consecutive months
● Spend at least RM500 with your debit card monthly
● Pay at least RM500 online on your bills, loans or credit card monthly
|Alliance SavePlus Account||0% – 2.25% p.a.||● Maintain a balance above RM400,000|
|OCBC 360 Account||0.05% – 2.15% p.a.||● Deposit RM500
● Pay at least three bills online
● Spend at least RM500 on your OCBC card(s)
|UOB ONE Account||0.10% – 2.15% p.a.||● RM50,000 in your account
● Spend a minimum of RM500 with your credit or debit card per month
● Pay at least three bills (minimum RM50 per bill)
● Deposit RM2,000 a month.
*as of April 2021
Practical Advice for Saving
- Building up an emergency fund
We all have experienced unplanned financial emergencies at some point of our lives, whether it is caused by a sudden loss of income, an unexpected medical bill or even a damaged mobile device (believe me, it happens more often than you’d think).
A couple years ago, I had an issue with my beloved MacBook Air as it was not switching on all of a sudden. After a quick consultation with the technician, I was told that the motherboard of my MacBook Air had been damaged and replacing it would cost RM2500 t. Now, you could buy a new laptop for the price of RM2500, nonetheless I had no choice but to pay for the repair of my existing MacBook since all my valuable data was stored in it.
The point is that RM2500 is the equivalent of a month’s salary for many people . No matter how big or small these financial emergencies may seem, they always tend to strike at the worst times.
One way to sustain yourself during emergencies like these is to set up an emergency fund. It is a good idea to set aside money specifically for unplanned expenses or financial emergencies. Without savings, even a slight setback can quickly become major like debt. A question you may be pondering is how much money should you have in an emergency savings fund. The general rule of thumb is to have at least 3-6 months’ worth of living expenses in an emergency fund.
It does seem overwhelming to put away that much money at first, especially if you are living paycheck to paycheck. However, even a small amount can provide some financial security. Besides setting specific targets for your savings, the 50/30/20 budget rule as mentioned above is a good system to keep you accountable for making consistent contributions to your savings.
2. Utilising multiple accounts for different purposes
For some of us, managing one bank account at our age can already be daunting. It can be challenging to keep track of all our finances and monitor our cash flow.Nevertheless , there are added benefits that come with having more than one bank account, especially if you are trying to stay on top of your finances. The average financial expert would recommend having four different bank accounts, but if you are just starting out, two separate accounts for your finances should suffice .
For starters, you should have a current account to keep track of your monthly expenses and purchases. This would be your main account, which you would use daily and withdraw funds from to make purchases or payments. Your savings account, on the other hand, should remain untouched and used only when the unexpected happens or if you are stashing away money for other big saving goals. It may be effective to separate your emergency savings fund from your savings account for other goals, as this will allow you to efficiently monitor how much money you have set aside for each purpose.
Splitting your monthly income into different accounts before spending is advantageous as you will be less inclined to overspend your money. At the same time, you will be continually working towards your savings.
Investing your savings in a low-risk venture
People are sometimes hesitant to invest because there is a high level of risk involved. However, it is possible to find a middle ground between the high risks of the stock market and the low return on cash savings, that is through lower risk investments. If you are looking for ways to save and grow your funds without a lot of risks, low-risk investments might work for you.
For example, Amanah Saham Bumiputera (ASB) and Amanah Saham Malaysia (ASM) are unit trust funds managed by Amanah Saham Nasional Berhad. ASB provides an avenue for Bumiputera citizens to save and invest in a fairly low risk and long-term investment instrument, with the price per unit of the fund fixed at RM1 and a low management fee. Each eligible investor is limited to a maximum investment of 200,000 units. On the other hand, ASM is a unit trust fund that is open to all Malaysians. With a similar investment strategy to ASB, ASM is considered a long-term, low-risk investment with consistent returns. However, unlike ASB, ASM has a limited number of units available for investment whereas the sale of ASB units is unlimited.
When comparing the two, ASB is often regarded as one of the better low-risk investment options in Malaysia due to its relatively high returns, despite the fact that their distribution rates have been declining in recent years. ASM has typically delivered slightly lower dividends than ASB, and has a higher annual management fee of 1% as opposed to ASB’s 0.35% Like most long-term investment instruments, it is thought to be a good hedge against inflation as the longer you keep your money invested, the higher the likelihood of better returns.
Ultimately , it is your call to decide how to manage your finances and whether you choose to invest, save, or do both. If you have short-term goals that you want to achieve , or if you absolutely require the money within the next couple of years, saving may be a good option for you. There is no risk of your balance decreasing unless you make a withdrawal from your account.
However, the issue with saving is that with rising inflation, your purchasing power eventually decreases. If you have enough savings,investing might be the better option for you, and that will be the subject of our next article!
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Researcher: Shruthi Venkatesan
Reviewer: Muhammad Bahari
Editor: Jessie Gan
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