The most dished out advise when it comes to personal finance is saving. Some go an extra step and give a percentage of what amount you are supposed to save from your income. However in my experience every action that you take should have a strong why behind and money is no exception to that rule. There is no one size fits all strategy when it comes to how much you are supposed to save but the following four savings accounts that can serve as a guide.
- Emergency Savings Account
Building up an emergency fund should be top priority when it comes to getting your savings in order. Financial experts suggest setting aside three to six months worth of your expenses (i.e. rent, utilities, groceries, transport) so as to avoid dipping in to your investments. As the name suggests you can only tap into it only for emergencies such as losing or leaving your job, unplanned medical emergencies e.t.c. It gives you the freedom to take risks so if you don’t have one it’s not too late to start building one.
- Retirement Savings Account
The purpose of a pension scheme is to give financial security upon retirement. Other than N.S.S.F which is a mandatory deduction and employers with a pension plan in place as an employee benefit statistics indicate that only 15% of the Kenyan population save for retirement despite the benefits such as tax advantages and compound interest.
Your contribution towards the pension plan is tax exempt up to Kshs. 20,000 per month. e.g . if you earn Kshs. 50,000 p.m and make a contribution of Kshs. 5,000 p.m only Kshs. 45,000 will be subjected to tax.
Retirement funds use the compound interest principle meaning you earn interest on your interest. With that in mind the earlier you start the more favorable it will be for you.
Disclaimer: Withdrawal before retirement means that you will be losing out when it comes to interest and tax penalties attached to it. If you are not withdrawing for a worthy cause that will generate income leave your retirement savings alone and let them grow.
- Short-term Savings Account
A short-term savings account is dedicated for short term expenses such as a new furniture or a vacation. These are goals that would require a bit of time and are less likely to be covered by immediately. This should be kept in an account with no monthly fees and at best no minimum balance.
- Long term Savings Account
A long term savings account is meant for purchases that can take two to ten years e.g. land, house or a car. A S.A.C.C.O or a fixed deposit account would be ideal.
The percentage of how much you dedicate to each of the accounts will depend on your goals.