After doing your budget and carving out your monthly savings, you may have wondered where you should leave this money so that it’s safe and steadily growing.
In order to make this decision, you need to be aware of the distinction between your savings and investment goals, and the kinds of savings accounts available to you.
Tip: Join CreditSav to see what savings and investments options are available for you.
Matching your savings with a goal
According to David O’Brien, managing director of Meerkat, the most important concept in a savings account is that it matches the time of the goal you are saving for.
“Do not save for emergencies in a 90-day savings account, as you may not be able to access the money immediately, when you need it. Equally, do not save for your retirement in a bank account as inflation will destroy the value of the savings over time,” says O’Brien.
He explains that high costs can erode the value of the savings, so you need to ensure that you understand all the charges of the product. To add to this, he says you cannot invest in volatile assets if you absolutely have to have the cash returned.
“If the school fees are due in 6 months, then you cannot invest in the stock market, as the market may crash in the period. However, if you are saving for retirement in 20 years, then the equity market offers the best long-term returns,” says O’Brien.
Differentiating between savings and investments
Before you select a savings account or platform, it’s important to distinguish between savings and investment plans. They may seem similar, but there are some significant differences.
According to Gareth van Deventer, head of advice and client care at OUTvest, savings are generally used to help people achieve their short-term financial goals and objectives.
“Savings are typically low-risk options with predictable or stable returns (usually interest earned), low volatility (money does not fluctuate much) and low risk (low chance of capital loss),” says Van Deventer.
He explains that savings accounts generally don’t generate inflation-beating returns over time. Savings are normally used to help with short term financial goals that have a 1 to 3-year time horizon objective.
“Things like saving for your wedding, a holiday, a deposit on a home or an emergency fund are good examples of savings,” says Van Deventer.
“When it comes to savings options, some typical examples are cash type funds, such as fixed deposits, call accounts, money market funds (unit trusts), and short-dated bonds,” he adds.
On the other hand, Van Deventer explains that investments are generally used to help people achieve their long-term financial goals and objectives. He says that they fall into the following categories:
- Higher-risk options with unpredictable returns – dividends and capital gains
- High volatility – money is subject to fluctuation
- Higher risk – the chance of capital loss is always present
He explains that investments deliver inflation-beating returns over time. They are normally used for longer-term financial goals that typically require an investment time horizon of five years or longer.
“When it comes to investment options, some typical examples include retirement annuities, pension and provident funds, preservation funds, endowments, exchange trade funds (ETF’s) and diversified unit trusts (those that have some money invested in shares on stock exchanges),” says Van Deventer.
He says that it’s also important to understand that all investments and savings accounts carry risk, and a good starting point would be to understand the risk of any investment before you commit.
Two kinds of savings options
If you’ve confirmed that your goals are in fact in line with saving, rather than investing, then you need to decide where to place this money.
According to Danie van Zyl, independent financial adviser at WMD Financial Services, there are generally two types of saving accounts.
“The first is an account in which you are able to deposit money that can remain there or that you are able to withdraw as and when you see fit. This option is considered extremely flexible. However, the interest that you will earn will be moderate,” says Van Zyl.
He explains that you’re able to earn a bit more interest if the initial amount you used to open the account is R100,000 or more, but it will not be a significant increase.
“The second type of savings account is more rigid: you will receive better interest, but this will come at a price, namely less flexibility,” says Van Zyl.
He adds that the initial payment is required to be fixed for a specified time frame of anything between 7 days and 12 months. The longer the agreed term, the higher the interest you receive.
Choosing the right account for your savings
Van Deventer outlines the following basic things that you should consider before choosing a savings account that can help grow your money:
- How long do you want to save? The longer you commit, the better the interest rate will be and, therefore, the return will be.
- What fees will you pay to the service provider? Fees can have a significant impact on returns. Happily, fees are something you can control by shopping around and partnering with a service provider that offers competitive, low fees.
- What are the tax considerations? Interest that you earn on cash investments is taxable. However, there are a few tax concessions available. Understanding tax implications is important and where SARS gives certain exemptions it makes sense to take full advantage of these. When it comes to cash savings, currently the first R23,800 interest you earn in a tax year is tax exempt if you are under the age of 65. If you are older than 65, this exemption is R34,500.
- How volatile is the savings account? In other words, does your money fluctuate a lot or not? Usually with savings accounts your money is less volatile than money in investments. But over the long term, investments generally give you a better chance of beating inflation.
- What is the risk associated with the savings account? Is your money invested with a reputable authorised Financial Services Provider (FSP) registered with the Financial Sector Conduct Authority (FSCA)? Be sure to ask for the FSP number and check the status of the service provider with the FSCA to gain comfort and peace of mind. If you are dealing with a non-regulated entity the risk is much higher than with a regulated entity. Find out what it means to be a registered Financial Services Provider.
- Find out or ask for the terms and conditions of the savings account.
- Enquire about the interest rate applicable and performance history of the particular savings account. Just bear in mind that past performance is not necessarily reflective of future returns, but it should give you a pretty good idea of what to expect from the savings account.
- Shop around and compare interest rates, service providers, fees, volatility, and the value proposition.
“Once you have ascertained the above, you should be in a better position to make an informed decision towards choosing a savings or investment account that can help you grow your money,” says Van Deventer.
He adds that there are many savings options, the key is selecting the one that best matches what you are trying to achieve and not what your neighbour thinks.