How to make your short-term savings work harder

Invest in fixed deposits, government bonds, high-yield savings accounts and money market funds, experts say

Any further savings beyond what is in the emergency fund should be put to work for one’s financial future. Antonie Robertson / The National

People usually have short-term savings in the form of an emergency fund or rainy day fund.

Personal finance experts recommend that this fund should have a minimum of three to six months’ worth of living expenses readily available to prepare for any unexpected financial commitments such as a job loss, medical emergency or car or home repairs.

Financial experts recommend that any further savings beyond what is in the emergency fund should be put to work for your financial future.

“Mostly, individuals will keep short-term savings in a basic bank account with little to no interest being paid on the deposits,” says Chris Keeling, a chartered financial planner at The Fry Group.

“These types of savings normally sacrifice investment growth in return for being readily available at short notice. However, there are alternative options available for making your savings work harder for you.”

Leaving your cash in a zero-interest bank account guarantees that it is losing value on a daily basis, especially during these high inflationary times, says Carol Glynn, founder of Conscious Finance Coaching.

While it would be ideal to find ways to gain a return higher than inflation rates, when it comes to short-term investments, people tend to focus more on liquidity and lower risk and so it is not always possible to outdo inflation in the short term. But any interest is better than none, she says.

However, Joseph El Am, general manager for the Mena region at digital wealth manager StashAway, warns that one key consideration is finding opportunities to earn a higher yield without sacrificing safety and accessibility.

Consumers are increasingly switching to cash accounts with competitive interest rates or high-yield savings accounts as a majority of banks in the Emirates continue to offer customers low savings yields despite 10 consecutive base rate rises by the UAE Central Bank over the past year.

While the cost of borrowing has risen in line with the rate increases, banks have been slower to pass on the benefits to savers.

Most cash accounts in the UAE offer either low interest or none at all, while most local banks have set minimum salary and minimum balance rule for their savings accounts.

People can capitalise on more competitive rates for their savings accounts, according to Mr Keeling.

“It pays to shop around for the best rates, which currently can be as high as 5 per cent – some banks will also offer a competitive introductory interest rate for new customers,” he says.

“It is important to note that these rates may only be for a limited time or capped at a certain balance, which is why you should always read the account terms before signing up.”

We asked experts to shortlist a few investment options to maximise returns on short-term savings.

Fixed deposits and certificates of deposits

Fixed deposits are time accounts offered by banks, which require you to deposit a specific amount of money for a fixed period, ranging from a few months to several years, says Mr El Am.

In return, you receive a fixed interest rate that is typically higher than that of regular savings accounts.

“Fixed deposits are a reliable choice for those seeking a guaranteed return and are willing to commit their funds for the specified term,” he says.

People could also save money in certificates of deposits, which are time-bound and offer higher interest rates than regular savings accounts.

By locking your money into a CD for a specific period, typically ranging from a few months to a few years, you can earn a fixed interest rate on your savings, says Ms Glynn.

“It’s important to consider the time horizon and ensure you won’t need the funds before the CD matures as you will incur fines and penalties if you need access to your cash before the agreed term of the product expires,” she warns.

Banks have a range of terms available, stretching from one month to more than 12 months. Mr Keeling from The Fry Group says the longer the term, the higher the return will be.

“As your savings will be tied up, you should make sure, where possible, that you will not require access to these funds,” he says.

High-yield savings accounts

Consider moving your short-term savings to high-yield savings accounts offered by your bank or another lender in your region, Ms Glynn says.

Often, online banks offer better options than traditional brick-and-mortar banks. As these accounts typically offer higher interest rates than traditional savings accounts, your money grows at a faster rate, she says.

Mr El Am says they offer the convenience of easy access to funds, low fees and often come with additional features such as ATM access and mobile banking apps.

However, Ms Glynn warns that you need to consider the costs of entering into these arrangements.

“For example, does your new high interest savings account carry a monthly fee or a requirement for minimum balances? Is the fee more than the interest you are likely to earn? Is the interest rate offered still attractive after deducting the fees?” she asks.

“Is the rate offered the annual or monthly rate? Sometimes, the rate sounds attractive but when you divide it by 12, it isn’t earning as much as you may have initially assumed.”

Often, there are special offers with high interest rates advertised to open the account, but the advertised rate is for a limited period of time.

Ensure you understand if the rate is subject to change after the initial offer period, Ms Glynn points out.

Another consideration is to understand if the rate is fixed or variable. If the latter, it may decrease over time. However, it also has the potential to increase if interest rates rise, she says.

Government bonds or Treasury bills

These are short-term debt instruments issued by governments. They are considered low-risk investments as they are backed by the government.

They typically have maturities of less than one year and can be purchased directly from the government or through a broker, says Ms Glynn.

“They usually offer a competitive interest rate and are a good option for those seeking safety and liquidity,” she says.

People could also consider buying Treasury bills, which are issued by the US Department of the Treasury.

Mr El Am says T-bills, backed by the full faith and credit of the US government, are considered one of the safest investments available. They have maturities ranging from a few days to one year and are sold at a discount to their face value.

“T-bills offer a fixed interest rate and provide a predictable return. These securities are an ideal option for risk-averse individuals looking for a low-risk investment with competitive returns,” he says.

National Bonds

Sharia-compliant savings and investment company National Bonds in the UAE and Premium Bonds in the UK offer an exciting opportunity for short-term savings, according to Hannah Greenwood, chartered financial planner and senior executive officer at Finsbury Wealth.

By participating in these programmes, individuals are entered into draws where they have a chance to win prizes that may exceed the interest earned on traditional deposits, she says.

Investing a portion of short-term savings in such programmes allows for competitive returns while maintaining the flexibility and accessibility needed for unforeseen expenses, Ms Greenwood says.

“Additionally, near cash funds such as the BlackRock Liquidity Fund are worth considering. With a current yield of approximately 5.1 per cent, these funds strike a balance between stability and growth,” she recommends.

“The era of lacklustre short-term savings returns is behind us. By staying proactive, individuals can unlock the true potential of their short-term savings and pave the way for a more secure financial future.”

Money market funds

Money market funds are types of mutual funds that invest in short-term, low-risk securities such as T-bills, fixed deposits and commercial paper, Mr El Am says.

“MMFs are an excellent choice for individuals seeking stability, easy access to funds and a potentially higher yield than traditional savings accounts,” he says.

“It’s a perfect option for someone looking to build their emergency fund.”

They typically require a higher minimum balance but they can also provide cheque-writing capabilities, making them more flexible for accessing funds when needed, Ms Glynn says.

Short-term bond funds

If you are comfortable taking on a slightly higher level of risk, you can invest your short-term savings in short-term bond funds, Ms Glynn says.

These funds invest in fixed-income securities with shorter maturities, providing higher potential returns than traditional savings accounts.

“However, it’s important to carefully evaluate the risks associated with bond funds and choose the ones with a solid track record and reputable management,” she warns.