No one ever saved money in a bank and got rich. The path to wealth does starts with saving, yes, but once those savings grow to a target amount, they should be used to make an investment. An investment that will earn you a significant periodic return or one that will appreciate in value so you can make a profit after your sell it.
When it comes to banks and interest rates, almost everyone is focused on complaining about lending rates and how incredibly high they are. When deposit rates are mentioned at all, focus is usually on fixed deposits of 30 days and over. Not many people are talking about the interest rates on savings accounts and how banks are getting away with paying next to nothing or nothing at all in most cases. The minimum interest rate banks have to pay on savings accounts is stipulated by the Central Bank of Nigeria (CBN) and this is 30% of the Monetary Policy Rate (MPR).
“What is MPR?”, I hear you ask. During this past economic downturn, you probably heard on the radio or TV at least once about how CBN has either raised or kept a certain rate as is. This is the MPR and it is the interest rate that the CBN charges banks when they lend money (also called the benchmark rate). As I type this, this interest rate is 14% per annum.
The CBN also pegs the minimum interest rate banks are expected to pay their savings account holders. This is called the Savings Deposit Rate (SDR) and it is usually 30% of MPR. If you are still following, then you would have figured out that SDR is currently 4.2% annually. Naturally, as MPR is raised or lowered, SDR will follow suit. Now, being that SDR is the minimum interest rate banks are mandated to pay, guess how much they actually pay. Yup! You guessed it. Exactly 4.2% across every single bank. They’re not even trying to compete a little bit on this one.
So the fallout is, if you diligently save N10,000 monthly for a year, you will earn a grand total of N1,94.76 in interest and as some of you know, if you make up to 4 withdrawals in a month, you will forfeit the interest earned for that month. Even if saving regularly on its own will not make you rich, it should at least earn a better interest right? For all the billions banks declare in profits every year, they should at least be able to part with 1% extra in interest?
So what to do? You save 10% of your pay every month and your target is to save enough so you can buy a car that you will use fulltime for Uber. Isn’t there somewhere safe you can keep your money and also earn a reasonable return on your savings while they grow?
Luckily there are a few alternatives out there that pay a higher interest. Granted, you may not have the convenience of accessing your cash via an ATM at any time, but your savings are not meant to be easily withdrawn anyway. Here are 4 alternatives to bank savings accounts that pay higher interest rates. Mind you, I have not listed treasury bills or fixed deposit accounts here as instruments of this nature have a high entry point of hundreds of thousands. I’m focusing on instruments that even someone saving N5,000 a month can have access to.
FGN Savings Bond
A government bond is essentially a loan to the Government. It is a contract between you (the bondholder) and the Government (the Issuer) whereby the issuer promises to repay you a specified amount at the end of a period. It also promises to pay an interest (which is called a coupon) periodically. This interest can be paid yearly but in the case of the FGN Savings Bond, the interest is paid quarterly.
“And what is the interest rate?”, I hear you ask. Between 11% and 12% for now. I say “for now” because it can move higher or lower depending on the issue date. Before I lose you, let me break it down.
There are several reasons the government may want to borrow money and they don’t need to borrow all the time. Even when they want to borrow, they have a number of choices where to borrow from. If they need Naira (not Forex), they can choose to borrow via the savings bond for a period of 2 – 3 years after which they will pay back. The last time this was done was in January 2018 and the interest rate was between 11% and 12% as I said. In the middle of last year, they were offering over 13%. Come February 2018, the rate could be either higher or lower and that depends on a number of factors.
Besides the higher interest rate, your savings are guaranteed, so you will always get your money back and if you want your money back sooner, you can sell the bond to someone else on the stock market. Finally, the interest earned is tax free. If you want use this savings vehicle, contact a stock broker near you.
Digital Finance Company
The FinTech explosion in Nigeria has given rise to a number of online financial services companies. Companies like Alat, Piggybank and CowryWise help you save money while also offering attractive interest rates as high as 15% per annum. The interesting thing is that these services all partner with banks and can still pay higher interest rates. Hhmm.
Insurance Savings Plan
Many people tune out when they hear the word insurance but hear me out first before you skip to the next heading. Let me use an analogy to explain how cool Insurance companies really are. If someone came up to you in the street and said give me 1% of the value of your house and if you lose your house in a fire, I will pay you back 100%. You would keep on walking right? So would I to be honest, I mean we weren’t born yesterday.
When a company that’s been around for some 30 years (and that’s a long time in Nigeria) does this though; a company that has actually kept that promise thousands of times and is still profitable, there must be something they are doing right. Well, what they are doing is investing that 1% (or whatever amount they collect) and getting one heck of a return as quickly as possible before they have to pay the 100%. It helps that they don’t have to pay back 100% all the time too. Insurance companies are (well, are supposed to be) the best investors of money in all of financial services. They would have to be wouldn’t they?
Now, if you had a chance to add your little monthly savings to the hundreds of millions that insurance companies invest monthly and get the kinds of returns they are getting, wouldn’t you.
They have savings plans that work like bank savings accounts and pay out a percentage interest per month which can be 2% – 5% higher than you would get in a bank if you want to play it safe. That’s as high as 9.4%, virtually risk free. They also have what they call unit linked investment plans. These are savings plan that have the benefits of investment plans. With these plans, they invest your money alongside theirs and you get back whatever they get back. If they make a 100% return, you make a 100% return and if they lose money (which can happen sometimes) you also lose money but it’s not as risky as it sounds though.
Before you start, you can select what level of risk and reward you want to be exposed to and you can pull out your money at any time. There is a fee for this service of course, typically 1% of your funds but it’s worth it when you have a professional investing your money for you. Speak to an insurance company near you and ask about their savings and investment plans.
Similar to insurance companies, asset management companies pool funds from different sources and invest as a pool, leveraging the pool size to get more attractive rates of interest and fees. Depending on how much or how little risk you want to be exposed to, there is a mutual fund out there for you and for many of them, you can start saving from as little as N5,000 a month. They too charge a management fee and in some cases, a bonus or incentive fee which means that if they perform better than an agreed benchmark rate, they get an extra bonus from your interest earned.
Also Read: Money Mistakes To Avoid in 2018
Enough Talk, Act Now
Guys, saving monthly is the foundation of financial independence but if you are still saving in a bank, as far as interest earnings are concerned, you might as well be keeping the money under your mattress. As an alternative, put a bit of money in each of these options every month if you can and benchmark their performance against once other. If not, chose the one that works best for you and start saving. Just do it, do it now.