Saving for something special?
With so many short-term investment options to choose from, saving for something special like a new car, dream wedding or overseas holiday can be daunting. Leaving your savings in a bank account may feel like the safest and easiest choice, but leaving it there for too long without earning any (or very little) interest can result in it losing its purchasing power over time.
How can my savings lose its purchasing power?
Each year the cost of goods and services increases by a certain rate, also referred to as inflation. For your money to retain its purchasing power, it will need to grow by inflation or more over the same period.
To put this into perspective, if you are saving towards a 10% deposit on a car that costs R240 000, putting aside R2 000 a month over the next 12 months would get you to your goal of R24 000. However, if the price of the car increases by inflation (e.g. 6%) over same period, a 10% deposit would now cost you R25 440 and not R24 000.
Inflation is currently running at 6.3% annually, therefore any interest rate that you receive which is lower than this over 12 months will erode the value of your savings.
What are my options?
It’s important to define upfront how much risk you’re willing to take and how long you plan to remain invested (i.e. your investment horizon). If you are looking for a low-risk investment option with an investment horizon of 12 months or less, the below investment options might be worth considering.
Call deposits are simple cash investments that allow you to access your money at any stage. They work on a tiered system, in that the higher your investment amount, the higher the interest rate you receive. Interest rates generally range from between 2%–7%. However, as the tiers are quite broad you will need to have a substantial investment amount (usually more than R100 000) to receive the maximum interest rate.
Fixed-term deposits are similar to call deposits in that they also work on a tiered system. The tiers are narrower, which means that you need far less money to receive similar rates. As the name implies, the investment has a fixed term, allowing you only limited access to your money until the term has ended. Interest rates range from 2% – 8%, depending on the investment amount and the duration of your fixed term.
Money market funds
Money market funds invest in a range of cash and other high-quality, low-risk investment instruments. In most cases, interest is calculated daily and accrued monthly, so the interest rate may change from time to time, based on the fund’s underlying investments. Money market funds generally do not operate on a tiered system, which means that you receive the same interest rate regardless of the value of your investment. In June 2016, the average money market fund generated a return of 6.94% over 12 months. Much like call deposits, you are also able to access your money at any time, without any notice.
So which option do I choose?
Deciding on an option largely depends on your investment amount and how quickly you need access to it. For example, if you are investing a small amount you may want to consider a money market fund, as the interest rate you receive is not based on the value of your investment or your investment term. Alternatively, if your investment amount is large enough, you may want to consider a call deposit or fixed-term deposit (if you are willing to forgo immediate access to your investment), as they generally offer higher interest rates for larger investments.
Choosing the right option can be tough, which is why we encourage you to get in touch with a good independent financial adviser to help you decide the best way to achieve your investment goals.
August 10, 2016
Grant van Zyl