Features & Sacco Leadership

Understanding the difference between savings accounts and fixed deposits

Understanding the difference between savings accounts and fixed deposits: SACCOs and Financial Education: Challenges facing SACCOs: How to grow group money: Types of SACCOs: process of withdrawing savings from a SACCO can be crucial. Here’s what you need to know on how to withdraw savings from a SACCO.

When it comes to saving money, it’s essential to choose the right financial instrument that not only keeps your funds safe but also helps them grow over time. In Kenya, two common options for saving money are savings accounts and fixed deposit accounts. While both offer opportunities to earn interest on your savings, they have distinct features and benefits. It is important, therefore; to understand the difference between savings accounts and fixed deposits before settling on one.

What is Savings Account?

A savings account is the most fundamental type of account offered by banks and financial institutions. Its primary purpose is to provide a secure place to store your money while allowing you to access it conveniently whenever needed. Here are some key features of a savings account:

  • High liquidity: You can deposit and withdraw money from a savings account at any time, making it highly liquid.
  • Low interest rates: While savings accounts offer interest on your balance, the rates are typically lower compared to other savings instruments. Interest rates usually depend on the bank.
  • Interest payment frequency: Interest earned on a savings account is usually paid out monthly, quarterly, or semi-annually, as per the bank’s policy.
  • Safety: The primary function of a savings account is to keep your money safe with the bank, providing security for your funds.
  • Transaction capabilities: Savings accounts allow you to perform various financial transactions, such as sending and receiving money, through electronic transfers or other means.
  • Minimum balance requirement: Most banks require you to maintain a minimum average balance in your savings account to avoid fees or penalties.

While a savings account offers the advantage of liquidity and safety for your funds, its lower interest rates may limit the growth potential of your savings over time.

What is Fixed Deposit Account?

On the other hand, a fixed deposit (FD) account is a type of investment where you deposit a specific amount of money for a predetermined period at a fixed interest rate. Here’s what you need to know about fixed deposit accounts:

  • Fixed tenure: When you open an FD account, you agree to lock in your funds for a specified period, known as the tenure, ranging from a few months to several years.
  • Higher interest rates: Fixed deposits typically offer higher interest rates compared to savings accounts. The interest rate remains fixed for the entire tenure of the deposit, providing certainty about the returns.
  • Interest payment: Interest on fixed deposits can be paid out at maturity or periodically, depending on the terms of the deposit.
  • Safety: Similar to savings accounts, fixed deposits are also considered a safe investment option as they are backed by banks and financial institutions.
  • Limited liquidity: Unlike savings accounts, fixed deposits have limited liquidity, meaning you cannot withdraw the funds before the maturity date without incurring penalties.

While fixed deposits offer the advantage of higher interest rates and fixed returns, they may not provide immediate access to your funds, making them less suitable for short-term financial needs.

Both savings accounts and fixed deposits serve different purposes in the realm of financial planning.

Savings accounts offer liquidity and accessibility, making them ideal for emergency funds and everyday expenses, while fixed deposits offer higher interest rates and stable returns, making them suitable for long-term savings goals. Choosing between the two depends on your financial objectives, risk tolerance, and liquidity needs.

Andrew Walyaula
Author: Andrew Walyaula

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com

Andrew Walyaula

About Author

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com

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