There aren’t many options when looking for a safe place to stash an emergency fund or save for a dream holiday or a new car. None of the secure investments that offer quick access and an investment horizon of less than a year are very lucrative.
The alternatives when looking at the two scenarios – saving for a specific short term goal or putting something away for an emergency – would yield returns of less than 4% per annum.
The reasons for the low returns are the short term investment horizon or that money must be available immediately.
A prerequisite when looking at where to put emergency savings is that the money needs to be readily available. Nobody can predict emergencies or know when they will happen.
The obvious place for an emergency fund would be a savings account.
Himal Parbhoo, executive officer for cash investments at FNB Retail, said an advantage of a dedicated savings account is that a savings account has no monthly fee and a client has instant access to their savings.
“Capital and quoted returns are 100% guaranteed. A client can also choose to schedule regular transfers to help them to save,” says Parbhoo. Currently, with interest rates in SA quite low, a savings account would pay interest of anything between 2.3% and around 3% per annum depending on the amount.
Short term savings or an emergency fund of R50 000 would earn 2.95% at FNB. Interest rates are much the same at different banks.
FNB savings account rates (per annum)
|Amount||Nominal rate||Effective rate|
|R1 – R19 999||2.30%||2.32%|
|R20 000 – R24 999||2.50%||2.53%|
|R25 000 – R74 999||2.95%||2.99%|
|R75 000 – R99 999||3.05%||3.09%|
|R100 000 +||3.05%||3.09%|
Parbhoo mentions that the FNB saving account can be linked to a current account that has a ‘Bank Your Change’ facility that automatically helps clients to save a specified amount each time they swipe their debit card. It rounds up any purchase by debit card up to the nearest R2, R5, R10, R20 or R50 and transfers the ‘change’ into the linked savings account.
Whether the change stays in the account used for daily transactions or moves to a different account should not really matter, but it does. It helps to instil a mindset of saving and offers a fraction of a percentage more in interest.
Parbhoo says the time horizon, the requirement in terms of access to the capital, and the amount of the investment will ultimately determine the most appropriate solution.
Multiple savings accounts
“Alternatively, a client can diversify their investment and open multiple savings accounts based on their savings goals with different interest rates and different maturity terms. They then benefit from a compound interest rate return.
“They could split their R50 000 to R100 000 into a savings account for amounts that they need instant access to, put some in a 32-day notice deposit and deposit the balance in a fixed deposit,” says Parbhoo.
The result would be an investment in which some of the money is available immediately, some within a month and the rest after a few months.
Looking at the interest rates of different investment alternatives illustrates that a blend of different investments would yield a higher return. For instance, R50 000 invested in a 32-day notice deposit will earn 3.4% compared to 2.95% in a savings account.
Interest on 32-day notice deposit
|Amount||Nominal rate||Effective rate|
|R1 000 – R4 999||2.50%||2.53%|
|R5 000- R9 999||2.50%||2.53%|
|R10 000 – R19 999||2.50%||2.53%|
|R20 000 – R29 999||2.90%||2.94%|
|R30 000 – R39 999||3.00%||3.04%|
|R40 000 – R49 999||3.10%||3.14%|
|R50 000 – R74 999||3.40%||3.45%|
|R75 000 – R99 999||3.45%||3.51%|
|R100 000 – R499 999||3.50%||3.56%|
|R500 000 – R999 999||3.55%||3.61%|
It is also noticeable that higher amounts earn higher interest, with even R1 making a difference. A fixed deposit of R100 000 earns an effective 3.56% per annum compared to 3.51% for R99 999. A quick calculation shows that the extra R1 earns an additional R50 in interest over 12 months.
The second scenario of saving for something specific or saving for a specific period requires a different approach and offers more options. Investment options also offer slightly better rewards.
In short, bigger amounts and longer investment periods offer higher returns. Even age can help.
“A fixed deposit account has no monthly account fee, [and] a client can choose their investment term between seven days and 60 months, or a maturity date. Capital and quoted returns are 100% guaranteed while the interest rates are fixed during their investment term.
“The interest rates are tiered by amount and a client can increase their investment at maturity, access the interest amount earned, and transfer it to another account or reinvest it. Clients over 55 years old get a preferential interest rate,” says Parbhoo.
Interest rates increase up to 4.25% per annum (nominal), yielding an effective compounded rate of 4.33%. A client over 55 years can expect an effective 5.01% per annum for a 12-month fixed deposit.
Parbhoo says people should set a savings goal and understand how much time they need to save for to achieve this goal, and also do some research on the savings account that will give them the best return.
Braam Bredenkamp, financial advisor at GraySwan Wealth, says investors need to start off by assessing their investment time horizon and risk appetite prior to deciding on an asset class or investment strategy.
“We believe that short-term fixed deposits may underperform SA inflation over the next year,” says Bredenkamp.
“Investing into a diversified portfolio of actively managed money market and income funds, and maybe a small portion into a low equity multi-asset fund, should achieve a higher yield than short-term fixed deposits over the next 12 months.”
Gregoire Theron, chief investment officer of GraySwan, says money market funds offer a better option than just cash in the bank.
“These funds are well diversified across a broad range of instruments and counterparty risk exposure is reduced. The return is usually higher than the interest one can earn on a small fixed deposit of short duration.
“The higher yield is possible because a money market fund pools small deposits into larger ones and invests for longer, but an individual’s investment is still readily available,” says Theron.
Furthermore, income funds normally offer higher returns than money market funds, if the investor has a six- to 12-month horizon.
Income funds are allowed to invest into longer-duration fixed interest assets and other asset classes such as listed property, preference shares and offshore interest-bearing instruments.
Income funds include longer-dated SA government bonds that currently yield roughly 9% per annum.
Theron says that while investing a portion of the available capital in a multi-asset fund with a low equity component may seem a bit riskier, the answer lies in the appropriate allocation to such a fund in terms of the broader total construct of a client’s portfolio.
“For example, an investor could allocate 40% of their R100 000 to a money market fund, 40% to an income fund (with capital preservation over three-month rolling periods) and 20% to a low equity multi-asset fund (capital preservation over 12-month rolling periods). It should meet their performance target while managing downside risk along the way,” says Theron.
When starting off, a savings account works well, with a saver adding fixed deposits and other investments as their nest egg increases.
Listen to Boitumelo Ntsoko’s interview with Trent Hodges of Gray Capital (or read the transcript here):