Best Savings Plans for Young Professionals in Kenya: MMFs, Saccos, and the Power of Endowments

Young professionals in Kenya really struggle to save. You might be earning “good” income, but you are facing high inflation, a volatile economy, and serious temptation to lifestyle creep (spending money as fast as it comes).

Despite all these challenges, you must look for a way to put some money aside to fund your current and future goals. I am here to help you do that, especially saving for future goals.

We all have future aspirations. There are three (3) main challenges of life; building a house for your family, educating your children, and building financial freedom in retirement. These are some of the challenges we shall provide solutions for.

There are certain savings vehicles that feel too easy for young people such as saving exclusively on mobile apps or fluid accounts. It feels so good, but the truth is, they rarely fund major mid-life milestones such as buying a plot of land, launching a business, or financing a wedding. Their liquidity, accessibility, and lack of saving discipline is the real enemy to saving for long-term financial goals.

While a strong financial plan requires liquidity, the most successful young professionals combine short-term flexibility with the structural, bulletproof discipline of endowment insurance policies.

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Today, we shall go through the best savings plans for young professionals in Kenya, defining where they fall in helping you achieve short and long-term financial goals.

Best Savings Plans for Young Professionals in Kenya: Where To Stash Your Cash In Kenya

There are various vehicles that you can use to stash your cash in Kenya. The most famous are Money Market Fund, Sacco, Treasury Bills and Bonds, Individual Pension Plans, and Endowment Insurance Policies.

Money Market Fund: Short-term Goals

Money Market Fund is a savings vehicle for short-term goals.

This savings option gives you fast access to your money and compounding interest.

The entry requirements to Money Market Fund are simple and you can join with as low as KES 100.

You can access your money within 24 hours if it is a huge sum of money. However, if it is just a small withdrawal, you can receive it instantly or within a few minutes.

Your money generates interest daily and doesn’t have to wait for the whole year to be credited.

Interest generated in Money Market is subject to withholding tax of 15% and the interest rate you get depends on the market performance.

If you are saving for long-term financial goals, Money Market is not your best vehicle. The enemy is easy money access/liquidity and the future performance of the market and how much you shall get at the end of your savings period is not guaranteed.

However, they work so well for short-term saving and it cushions your money against inflation.

Sacco Savings (Digital & Tier-1 Saccos): Development Loans

One reason you need Sacco savings is to help you access development loans. That is the greatest strength of being a member of a Sacco.

The loan you access is pegged on the amount of savings in your account, used as a collateral. We all need a loan at some point and, therefore, we cannot ignore a Sacco account.

However, for short and long-term savings, Sacco may not be your best suit. Sacco dividend yields are low compared to Investment portfolios in the Money Market.

Saccos invest their excess money in the Money Market. If it were not for the loans, why not just under cut them and invest your money directly in the money Market.

Another challenge with saving in a Sacco is the easy accessibility of your savings. The temptation for withdrawing them is real.

Treasury Bills & Bonds (via CBK DhowCSS)

Treasury bills and bonds are “risk-free” investments but require manual reinvestment or larger chunks of upfront capital if you are to see any gains.

Many young people may not have that kind of money and even if you qualify with the little money you have, you may not see any significant gains.

For that reason, you may be forced to look for a savings account where your moderate monthly savings from your salary can be accepted continuously.

Normal Bank Savings & Fixed Deposit Account

The only reason you would put some of your savings in a normal bank savings account is because of liquidity and accessibility.

It might also help you with improving your eligibility for getting a loan. Otherwise, what else would you keep your savings in a normal savings bank account.

You are exposing your money to inflation since bank savings rarely yield any meaningful savings returns.

The other alternative that banks offer to aspiring savers is the bank fixed deposit.

If you ask me, fixed deposits have been replaced by the Money Market. Their rates are way off from market rates. They also require huge chunks of upfront capital.

Individual Pension Plan (IPP): Retirement Savings

Individual Pension Plan (IPP) is a retirement planning product. The product is designed to help you save for old age by setting up a fund that you can be contributing to as you wish.

Other than being a retirement savings plan, the amount you save in it and how regularly is not defined.

Definition is only put on when to access it. The best time to access this find is when you reach retirement age. In case you want to access this fund before then, you will be charged 30% tax of any amount you withdraw.

This is meant to discourage you from accessing the funds. I always encourage young people to consider endowment insurance policies rather than IPPs, especially when they have a steady income flow.

An endowment insurance policy allows you to access your fund when in your prime, between 35 years to 45 years or up to 50 years.

Endowment Insurance Policies: Long-term Savings

What is an endowment insurance policy? An endowment policy is an insurance policy that combines a structured savings plan and life protection.

When you enroll in an endowment policy, your money yields savings returns and your life is protected from unforeseen events in one’s life such as death and permanent disability.

In case the policyholder dies or becomes permanently or partially disabled due to illness or accident the sum assured is paid when due and the regular contributions (premiums) are waived on the occurrence of the unfortunate event.

In an endowment policy, the savings returns are guaranteed and are not determined by market conditions as long you pay the premiums. Your dream is locked.

This is why endowment policies are so popular because they bring certainty in your long-term goals.

You can use an endowment policy to educate your children, build a house, buy land, start a business, and so much more. This dream is assured regardless of the turn your life takes.

There are different types of endowment policies. There are those that pay a single lump sum upon maturity. These are suitable for a goal that requires a lump sum such as buying a house.

There are others that pay regular survival benefits along the way of your savings period (Education Insurance Policies or Money Back Endowment Insurance Policies). These help you achieve those goals that require continuous funding such as education.

Benefits of Endowment Policies

Endowment insurance policies have the following benefits to young professionals and salaried people.

• Savings Discipline. Endowment policies instill saving discipline to young savers.. They require you to make regular contributions consistently. You can choose to make your contributions monthly, quarterly, semi-annually or yearly. For young professionals, monthly premiums are the best through direct payroll deductions.
• Maturity Payout Is Not Taxable. The survival benefits you receive along the savings period or at the end of the savings period are not taxable. Actually, along your savings period you will enjoy tax relief.
• The 15% Insurance Tax Relief. Under the income tax act, once you enroll in an endowment policy of 10 years or more, you qualify for a tax relief 15% of the regular contributions (premiums) capped at KES 5,000 per month or KES 60,000 per month.
• The Premium Waiver (The Ultimate Safety Net). In contrast with MMFs, Sacco savings, treasury bills and and bonds, IPPs, and bank normal and fixed deposits, in case the policyholder dies or becomes disabled, premiums are waived from the time of occurrence of the unfortunate event and the maturity payments are made when due. The insurance company pays from where you left and the maturity payout is made to you or your beneficiary. This feature is meant to lock or guarantee your financial goals.
• Policy Loan. You can borrow against your savings in what is termed as a policy loan in insurance. You access up to 90 % of your savings after your policy reaches a particular stage, 3 years in most cases, and you can use this money to attend to immediate needs or goals.

Please note: Endowment Insurance Policies work well when saving for long-term financial goals of 10 years or more. They are not suitable for short term goals, unless saving for education through education insurance policies.

A Comparison Table for Different Savings Plans Available To Young Professionals in Kenya

The best savings plan for you as a young professional in Kenya will certainly depend on your goal.

For short-term financial goals, the Money Market is a good investment vehicle. It cautions your money against inflation and gives you some meaningful returns that sacco dividends and bank fixed deposits.

If you need a strict retirement savings plan, you can go with an Individual Pension Plan. However, I would encourage you to consider an endowment policy for such a goal.

For long-term savings, endowment policy will work so well for you. The final payout is guaranteed and untaxable, and your financial goals are locked in case of unforeseen events against your life.

If your objective is to build a fund for the future education of your children, that goal will be locked whether you are there or not. The maturity payouts are made to your family to ensure your kids attend school as planned.