Let’s say you’ve given your budget the once-over and found a spare R1000 that you can afford to put away month after month for at least five years. As with any investment, you want the best returns at as low a risk as possible, and preferably a savings or investment vehicle that is flexible enough to allow you to deposit extra or, in an emergency, withdraw your money at short notice.
You may be immediately attracted to the obvious safe banking options, such as a debit order from your current account into a separate savings or notice account. But these generally offer very low rates of return. Looking further afield, you should find ways to earn a better return without necessarily taking on more risk.
At the very least, you want to beat inflation, which eats into your savings. Currently, inflation is running at about 5%, so if your returns are below that, you are actually losing money year by year.
1. REDUCE DEBT
Before you start looking at saving, you need to look at your debt, because that’s the first place you can score: what you pay in interest on debt is normally a lot higher than what you receive in interest on savings. First eradicate any debt on your credit card account and your retail accounts, because they usually charge the highest interest
Once short-term debt is taken care of, you can channel R1 000 a month into your mortgage bond. By putting more than the required minimum into your home loan account, you are, in effect, saving at the rate of interest of the loan, without paying tax on the interest saved, which is almost certainly more than you’d be guaranteed anywhere else. You also substantially reduce the term of your bond.
2. BANK DEPOSITS
Most of us have a bank account for everyday transactions, so opening a separate savings account into which to transfer R1000 a month is certainly a convenient option – except that most banks’ savings options fall far short of offering decent inflation-beating returns.
Notice deposits are relatively flexible in terms of depositing money but you must give a defined period of notice (for example, 32 days) to withdraw money. This limits your accessibility, which is bearable only if the interest rates are worthwhile.
Fixed deposits are designed for lump-sum savings, but some banks offer more flexible arrangements that allow you to make multiple deposits over a fixed period. Interest rates are better than for notice deposits. The downside is that you cannot access your money before the term is up without the bank imposing a penalty.
3. UNIT TRUST FUNDS
Unit trust funds are extremely flexible, allowing you to withdraw money or put in extra when you want to. Your choice is extremely wide – currently there are about 1 500 funds in South Africa available to individual investors, excluding offshore funds marketed here. Most will let you invest R1 000 as a minimum per month, although many have lower minimums, and a handful have higher ones.
Funds are categorised according to the assets they invest in. Three popular types are low-risk money market funds, medium-risk balanced funds, and high-risk equity funds.
- Money market funds offer yields in line with prevailing interest rates, but they are usually better than most bank deposit rates, although yields fluctuate daily. They are low-risk, so there is very little chance of losing money.
- Multi-asset balanced funds distribute their assets across listed shares, property, bonds and cash, and cannot hold more than 75% of their assets in shares. Because of the diversification of investments, they are not as volatile and are lower risk than pure equity funds.
- South African equity funds invest at least 75% of their portfolios in shares on the JSE. In the past they have provided the most attractive returns for long-term investors, but, because of the volatility of share markets, there is a relatively high chance of capital loss over the short term. Investing monthly, rather than a lump sum, tends to smooth out your returns (when the unit price drops, your monthly R1 000 buys you more units). In the case of the markets taking a dip just before your five years are up, you could probably afford to keep your investment for a while longer to ride out the storm.
4. EXCHANGE TRADED FUNDS
Exchange traded funds (ETFs) are similar to unit trusts in that they invest in the financial markets and are as easy to access. Most ETFs passively track an index, such as the FTSE/JSE Top 40, by holding the shares in the index in the same proportions. As such, they perform in line with how the index performs, which is often better than many actively managed funds. ETFs have become popular because the investment fees are lower than those of active unit trust funds.
5. TAX-FREE INVESTMENTS
Both banks and asset managers offer this type of investment, which may be a savings account or unit trust, but with the added benefit of not attracting any of the taxes normally associated with investments: tax on interest, on dividends and on capital gains. You are allowed to save up to R36 000 a year (or R3 000 a month), and your lifetime contributions are limited to R500 000. You can withdraw money any time, but you cannot “replace” what you have withdrawn if that amount exceeds the annual and lifetime contribution limits. These limits have been imposed to encourage you to save for the long term, such as for retirement.
PERSONAL FINANCE