DEFINITION of Microsavings

Microsavings is a branch of microfinance, consisting of a small deposit account offered to lower-income families or individuals as an incentive to store funds for future use. Microsavings accounts work similar to a normal savings account, however, are designed around smaller amounts of money. The minimum balance requirements are often waived, or very low, allowing users to save small amounts of money and not be charged for the service.

BREAKING DOWN Microsavings

Microsavings plans are usually offered in developing countries as a way to encourage saving for education or other future investment. People who invest in these plans are better prepared to cope with any unforeseen expenses, which would usually harm lower-income individuals.

How Microsavings Accounts Are Structured

Many microsavings programs either require small or no fees to use the service. The goal is to encourage the account holder to set aside funds even in small increments to build up their savings over time. Such programs may be offered by nontraditional institutions, including numerous startups that develop associated apps to keep the user abreast of their savings habits. Some of the services automatically rounding everyday purchases to the nearest dollar and diverting the spare change from those purchases to a microsavings account. For example, if a consumer buys an item for $5.75 with a debit or credit card, such a service would deposit 25 cents into a microsavings account.

The development of microsavings accounts stems in part from an effort to change a trend of the populace tending to consume and spend more than it saves. It is also a way to reduce some of the barriers to entry that may exist with traditional savings accounts. For some individuals and households, banking institutions may not be conveniently located or accessible for them to visit in order to open an account.

The terms of traditional savings accounts may also limit the ability of individuals with small funds to open such accounts, particularly if they do not have the minimum amount to get started. The stipulations of traditional savings might make the benefits of starting such an account limited or nonexistent for someone with a small amount to get started. For instance, a traditional savings account might incur regular fees if a minimum balance is not maintained. Further, the account might generate negligible interest if the balance does not meet a certain threshold. The process of opening a traditional savings account could also prove to be intimidating to individuals who have little to no experience with banking institutions.