Where Should You Keep Your Money ?

Olebile Makupe | Monday April 19, 2010 00:00

There are many different types of investment instruments available, and the choice of which one is suitable for you depends on the amount being invested, how soon the funds will be required, eventual use of funds, and expected rate of return.

Account StructuresEvery individual or entity who handles money needs an account into which all their income will be received and all commitments or payables made from. This helps the accountholder track use of money, and ensures funds will be kept safely until they are required. The type of account normally used for this purpose is the 'current' account, which usually does not earn any interest. In addition, it is important to prepare for future planned expenditure, or for emergencies and other unplanned expenditures (saving for the rainy day). A separate and conscious allocation into an account set up specifically for this purpose needs to be made.

For short term savings, there are many instruments available which can be used by all types of investors: individuals and companies. Financial institutions offer a wide range of savings, call and term deposits, characteristics of which will be explored below.

Current AccountsCurrent accounts are non-interest bearing accounts maintained by financial institutions on behalf of their customers to allow them to receive and make payments, including salary payments and day to day payments. A current account holder is normally issued with a cheque book and an ATM withdrawal card, to allow access to funds at all times. The benefits of a current account include the following:Faster and trouble-free access to cash

offers the account holder convenience through electronic payments, which means the accountholder can do transactions without having to go to the bank

Checkbook facility for non-cash paymentsManagement of usual payments like salary receipts and payment of bills  Online management of money which allows the account holder to view their account as long as they have access to the internet Some cards issued on current accounts can be used internationally while travelling, therefore no need for the traveller to carry excess cash

No need to carry cash in bulkProvision of statement so the account holder can easily track all transactions that go through the account, Current accounts provide the facility to make direct payments for utility bills, rent and any other commitments the account holder may need to make on a regular basis. There are two ways in which a current account holder can do this: Standing Order or instruction: If one instructs the bank in which they hold a current account to make a monthly payment of a fixed amount to a particular account, it is known as a standing order. Account holders can change the amount of the standing order by changing the instruction provided to the financial institution or bank.

Direct Debit: Accountholders can also give an instruction to a recipient of money to withdraw a certain amount of money from their account, by signing an instruction that the recipient will submit to the accountholder's bank. This arrangement is usually preferred by insurance and security companies that require payment of an agreed, regular premium.

For individuals, most commercial banks require confirmation of employment, identity and residential address of the account holder to open an account. For companies, the relevant registration documentation and identification for directors is required.

Savings AccountsA savings account is an interest-bearing account that requires a low opening balance (can be as low as BWP 50.00), although this minimum amount differs from institution to institution. Savings accounts allow you to keep your money in a safe place while it earns a small amount of interest. This interest will be calculated daily based on the balance in your account and paid into your account on a monthly or annual basis, depending on the type of account you choose. Savings accounts can be opened by almost anyone who is able to raise the minimum deposit required, and for people of all ages, including minors and non-employed people. Financial institutions provide access to funds held on a savings account through issuance of an ATM card or over the counter. Electronic transfers as applies to current accounts can also be available for savings accounts. Most financial institutions limit the number of times an account holder can withdraw funds from a savings account, and may charge and will charge a penalty if withdrawals exceed the set threshold. There is also a minimum amount that the institutions may require to be maintained in the account before interest is paid, and balances below this threshold will not be paid any interest.

Call AccountsCall accounts are the other type of interest- bearing account, which however, usually have a higher minimum opening balance than savings accounts, and require a certain notification period before funds can be withdrawn. This period is usually 24 hours, but may vary from one financial institution to another. No cheque books or withdrawal cards are issued for this type of account. Companies usually open call accounts in addition to current account to ensure they are paid interest on any excess amount not utilised for day-to-day operations. Banks often allow automatic transfer of funds from call accounts to fund transactions made out of current accounts and for the transfer of excess funds held in the current account to call account at the end of each day to fully benefit from interest paid on the call account. However, because of the higher minimum balance requirements for call accounts, they are not usually suitable for small, individual investors. Interest paid on call accounts is usually higher than that paid in savings accounts, and is calculated on the daily balance and paid at the end of each month.

Next week we will look at term deposits and other short-dated investment instruments available in the Botswana market.Olebile Makhupe is the Head of Global Markets at Standard Chartered Bank Botswana