CAPE TOWN – In this advice column, Rick Briers-Danks from Veritas Wealth answers a question from a reader who is putting money aside for emergencies.
Q: I have three months’ salary saved up as an emergency fund. Where is the best place for me to store that money? My bank interest rate is 4.6%, but should I look at the money market or even unit trusts? In addition, I will be purchasing a home next year and am hoping to obtain an access bond. As a first time buyer I expect to get an above prime interest rate, so should I rather store my cash in the bond?
Firstly, well done on saving three months’ salary! This is a very big first step towards financial independence.
There is nothing particularly wrong with using your bank’s deposit account to store these funds. You could earn a marginally better rate using a unit trust-based money market fund, but this comes with some risk, as we have recently seen with the African Bank fiasco.
Money in a unit trust may also take slightly longer to access if you need it for an emergency. The turnaround time for releasing funds from a unit trust is about five working days, whereas your bank would probably be able to get it to you a bit quicker.
For these funds, we would not be more aggressive than a money market investment as you never know when you will need the money. With a potentially very short investment horizon, we don’t believe it is worth taking any investment risk.
Once you have bought your home and have a bond in place, you will need to confirm with your bank that the bond has an access facility. This simply means that any overpayment into your bond is earmarked as such and is accessible to you. While it is in your bond account it reduces the amount of capital you have outstanding and you therefore pay less interest.
We would then encourage you to store the emergency fund ‘in your bond’. Very simply put, if the interest you receive on the cash (4.6% in your case) is less than the interest you are paying on your bond (let’s say prime +1%, so 10,25%) then it makes sense to keep the funds in your bond.
It also may make sense to hold your bond and current account with the same bank as you could then move funds between the various accounts with the click of a mouse. Before finalising your bond, make sure you will have access to overpayments, as different banks have different rules.
It is also very important to ensure that your bank cannot shut down your access facility, which some banks did in the wake of the 2009 financial crisis. This might leave you with a serious cash flow problem.
Rick Briers-Danks is a Partner at Veritas Wealth Management.
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