Transactional accounts are designed to receive money, which then gets transferred or debited to various other accounts or funds, such as your savings or your retirement plans.
However, what happens when you leave money in your transactional account? We look at the downside of these accounts and the dangers of leaving your money there, and we consider some advice.
The downside of transactional accounts
According to Reagan Mitchell, certified financial planner and managing director of WealthyMe, interest rates in South Africa are the lowest they have been in 50 years.
“At the moment, the repo rate sitting at 3.5% and the prime lending rate to consumers at 7%. If you are lucky, you will earn 5.75% on a 12-month fixed deposit account,” says Mitchell.
He explains that interest rates on transactional accounts range from 0.25% to 2.75%, which is very low in comparison to savings accounts with the same banks.
“Unfortunately, there are many people who get lumpsum payments into their transactional accounts and leave the money there, which earns virtually no interest in an already low interest rate environment,” says Mitchell.
He advises that consumers seek financial advice to optimise the returns on their portfolios, to fend off the inflation risk to the buying power of their money.
Dangers of leaving money in transactional accounts
Mitchell says that there are numerous dangers to leaving your money in a transactional account. He highlights the following.
- There is an increased temptation to spend the money and erode your capital prematurely.
- There is a fraud risk when keeping your money in a transactional account.
- The interest on your savings would be much lower than the inflation rate if you leave it in a transactional account. This means your spending power will be significantly less in the long run.
Marissa Vorster, accountant at Taxless, explains that even saving accounts are used for day-to-day transactions, and not necessarily to accumulate high returns.
“The risks associated with savings accounts are low, and so is the return. Ultimately, the higher your risk, the greater the return,” says Vorster.
Be careful whose advice you take
Mitchell points out that it’s important to seek professional and objective advice before making an investment decision with your capital.
“Often when consumers have lumpsum payments into their accounts, their banker will call and offer the client a range of fixed deposit accounts. Most of the time the interests of the client and the banker are not aligned,” says Mitchell.
“The banker has a sales target and would sell the client a fixed deposit without understanding the full scope of the client’s financial situation. This is why it's valuable to seek the advice of a certified financial professional who is properly qualified and experienced,” he explains.
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