SAVINGS HAS been defined as excess or surplus of income over consumption, or to put it another way, a deferral on consumption. Jamaicans think of savings as putting money away for a 'rainy day' or future use and they relate this to depositing money in banks, credit unions, and building societies. Then, there is also the popular traditional method the 'partner' plan, commonly referred to as the 'poor people's savings plan'.
Savings, in the formal context of a financial institution, has the distinct advantage of allowing account holders ready access to money. However, interest paid for differing consumption in a savings account is usually much lower than that paid for term or fixed deposits which, as the name suggests, refers to specific time frames and set rates of interest on funds placed at fixed interest, until the date of maturity.
A WIDER LANDSCAPE
The landscape, with respect to savings, has changed markedly in recent years, compared to the days of our grandparents. Savers now have wider options, as the avenues for savings increase. In former years, the choices of saving in the formal system were linked directly to, as mentioned before, building societies, credit unions and commercial banks, in addition to post office savings through the Government Savings Bank (which later became The Worker's Bank in the 1970s); as well as savings bonds, which the government offered over a short period during the 1960s.
Jamaica now has several financial institutions offering a wide and dynamic range of products not previously available. These products, however, have not been wholly supported by a structured and sustained public education programme. As such, many Jamaicans have not been able to avail themselves of the full range of savings and investment options to meet their needs and improve their wealth.
SAVINGS OPTIONS
Savings accounts
While savings accounts attract lower rates of interest, the rates may be changed without notice by the financial institution. These accounts primarily allow a degree of flexibility and the luxury of depositing and withdrawing at anytime without penalties. The drawback here is that some financial institutions will pay out on the lowest monthly balance. The proper timing of withdrawals or deposits earns better returns. It is important to note that some financial institutions will link deposits with the issuing of loans to savers at preferential rates, this is largely prevalent in building societies and credit unions. Savings may also be contracted for specific periods at set interest rates. One may opt for the interest to be paid in cash when due, or for it to be added to the principal.
Ready Access
Through the implementation and utilisation of advanced technology, financial institutions have now afforded customers ready access to their accounts, without having to physically enter the institutions' halls. Accordingly, customers are able to make lodgements or withdrawals to their accounts, or effect transfers or payments at any hour of the day, seven days per week, through the use of automated teller machines (ATMs), or on-line banking services, facilitated through Internet access. ATMs are conveniently located on the exterior of most financial institutions, as well as other commercial and public thoroughfares such as shopping plazas, airports, post offices and gas stations. In addition, through cooperation at the institutional level, automated teller machines also facilitate transactions across the board from several financial entities, making it convenient for customers who no longer have to visit several locations to do business.
Fixed Deposits
The fixed, or term deposit, as the name suggests, refers to specific time frames and fixed rates of interest on funds placed until the date of maturity. For the most part, contracts tend to penalise the saver for encashment before the expiry date and larger sums usually attract higher rates of interest.
The advantage of the fixed deposit is that the set time allows for fixing rates, which are usually higher than savings, but they do not usually have flexibility of encashment, when the depositor might want to access the funds ahead of the maturity date. In the interest of customer relations, however, some institutions may allow early encashment but a penalty may be charged. As with any account in a recognised financial institution, the principal and interest are guaranteed, under the depositors' insurance scheme, introduced by government in the mid to late 90s, as a result of problems in the financial sector. Under the scheme, depositors' funds are insured up to $300,000, per account, at any one institution.
Partner Plan
The 'partner' system is a traditional method of saving and is still seen by many as a convenient way of putting away funds for future use. Although this option is particularly popular among individuals at the lower income level, who tend to target the funds for specific purchases; it is not, restricted or exclusive to this group.
There are two main disadvantages to this system. One is that all participants, except the first drawer or beneficiary, suffer losses on their funds, which earn no income while on loan to the others in the scheme. Secondly, there is even greater risk of losing part, or the entire amount in the pool to be paid out, before collection by all but the first drawer.
THE RISKS OUTWEIGH
THE BENEFITS
While its genesis dates back many years and has yielded benefits for many persons who have been involved, the partner is deemed a risky undertaking and, in reality, is a losing proposition. Given the risk associated with this system, it is ill-advised to channel funds into these schemes; rather, it is deemed wiser to deposit funds in an interest-bearing account with a financial institution. To facilitate an on-going savings plan, employed persons could give consideration to implementing a payroll deduction, which would entail a mutually agreed sum being deducted from one's salary and lodged to a savings account. This is guaranteed to accrue interest, no matter how small and, in the same vein, would facilitate the building of relationships with financiers for future benefits.
