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Saving Mechanisms

You can choose to save through formal, semi-formal or informal institutions, and in the form of cash or non-cash.

Non-cash forms of saving are assets, such as jewelry, consumer durables, or livestock that can quickly and easily be converted to cash and generally retain their value. Land is also an asset in which you can invest and hold your savings; it retains its value but is less liquid than livestock.

Informal savingssavingsimg6

Informal savings include saving cash at home, which keeps your cash very accessible and allows you to avoid the transaction costs associated with saving at formal savings institutions.

This form of informal savings has two significant disadvantages: the temptation to spend the money and the risk of theft. You need strong discipline to both avoid spending these savings yourself and deny the pleas of other family members.

Furthermore, money saved at home does not earn any interest, and thus may lose value over time.

Saving in-kind (gold, livestock or land) is another form of informal savings.

Semi-formal savingssavingsimg7

Semi-Formal savings encompass deposit collectors and group savings mechanisms, including rotating credit and savings associations (ROSCAs) called committees in Pakistan, village banks, solidarity groups and self-help groups. Familiar and simple, the group mechanism encourages discipline, scrutiny and support among members. 

The advantage of ROSCAs is that each member receives a lump sum of money at one time, with no loan or interest payments. However, a corresponding limitation is that members typically do not earn interest on money they have saved. Members of self-help groups borrow from their collective savings with the obligation to repay with interest, but they also receive periodic dividends. 

Limitations of group savings include instability of the groups, disagreements among members, and limited access to funds.

Formal savings

Formal savings involve financial institutions, including banks, post offices, microfinance institutions, credit unions or cooperatives. They offer another widely used option for saving cash. Savings in these financial institutions are generally safe and earn interest. They offer a range of savings accounts tailored to different financial needs. 

Formal financial institutions offer a wide variety of savings products. Regular or passbook savings is the most widely used type of account for regular transactions because the timing and amount of deposits and withdrawals are flexible.savingsimg8

Typically, you are allowed a set number of ―free transactions each month, and will be charged a fee for any additional ones. In exchange for the right to make frequent transactions, the bank pays very low interest on passbook savings accounts. Account transactions are tracked through a passbook, and a minimum deposit is usually required in order to open the account. This account is appropriate when you need to make regular deposits and withdrawals, and require easy access to your savings.

Contractual savings are an alternative form of savings that require you to deposit a fixed amount on a regular basis over a pre-determined period of time. Although contractual savings can be structured in many ways, access to savings often is restricted until the contract is fulfilled, and you will be charged a penalty for withdrawing your funds early. This type of account will be useful if you have a regular source of income that enables you to meet a commitment to save at regular intervals for future goals.

Time deposits require a fixed sum to be deposited for a pre-determined amount of time and interest rate. They are not accessible during this period of time, but generally yield a higher interest rate than regular or contractual savings. You may be interested in this account if you receive a lump sum of money that you do not need immediately. To save for a future goal and earn maximum interest, you can use this account to place that money out of reach for a pre-determined amount of time. You choose how long that period will be based on your estimation of when you might need the money. Time deposits vary from six months to five years, and typically, the longer the time period you choose, the higher the interest rate will be.