Anyone who has ever tried to save some money has been faced with a bewildering array of saving and investment account options. Fixed-deposits, money markets accounts or ETFs, how do you know which is the best option for you? We spoke to Stuart Kantor at Kanan Wealth to bring you this guide to saving and investment accounts.
In reality, in most cases, a savings account is not the best place for your savings. “I’m of the opinion that you should never invest in a savings account unless it’s in the extreme short term, which is less than a year,” says Kantor.
Essentially this means that if you are saving up for a short-term savings goal like a sofa or a holiday that you intend to buy before the end of the year, then a fixed-deposit or fixed-term savings account at your bank is a good option.
Kantor explains why. “The important thing to understand here is that short-term saving is your goal and you want to be able to withdraw your money before the year is out without having to worry about how well the markets are performing,” he says. “You accept that you will earn some interest while you save, but this won’t be enough to beat inflation. At the same time, there is no risk in a savings account, so your capital and your interest rate are guaranteed and there is no chance that you will lose any money.”
The next safest product is an investment product called a money market account, which delivers a slightly better return than a fixed-deposit that still doesn’t beat inflation – at the very best it gets to a 0.5% difference – and is a very low-risk option. However, it is remotely possible that you could be exposed to a minor loss. To illustrate, Kantor explains that when African Bank collapsed this year, money market accounts that were affected only experienced an insubstantial loss.
Apart from making sense for your short-term savings, money market funds are good options for what we know as “rainy day funds” or less optimistically “retrenchment funds”, which should amount to three to six months’ worth of your monthly expenses. You don’t know when you’ll need the money, but chances are that if you do, you’ll need it right away, so you don’t have the luxury of riding out any volatility.
He does caution, however that if you choose to invest in a money market account, you should go directly to an independent fund manager like Allan Grey or Coronation, because a financial advisor will charge you fees. If you want to go through your bank, make sure that you are charged only administration fees and not advisory fees, as these will eat into your moderate earnings.
However, it might be that your financial advisor helps you to understand that a money-market account is best for your needs, or helps you to allocate your short-term savings to this type of account, in which case a low advisory fee is appropriate.
For any other type of saving, apart from short-term savings of less than 12 months, you should be investing to beat inflation because every year your money is worth less so you need it to grow in real terms as well as give you a return. Kantor believes that unit trusts are the ultimate financial planning tool, allowing you to match your risk and returns to your goals and timeframe. Financial advisors should quote your return in percentages above inflation, so you can work out what you get after their fees have been deducted.
For instance, if you are putting away money for your daughter’s university education, and she is currently in grade 10, you know you’ll need the money in three years. You will speak to your financial advisor about a moderate-risk fund that beats education inflation (which is currently somewhere around 10% per year).
Any investment term longer than three to five years can be exposed to higher levels of risk because you can ride out any volatility in the market and with any luck, earn significant returns.
You can invest in unit trusts without an advisor or you can invest in the stock exchange via exchange-traded funds, which represent a basket of shares and save you money on management fees, or through your bank’s share trading platform. Find out more about the different investment options available to you in this article.
There is no question that you should be saving, the only question is how. It boils down to this: if you are saving for less than a year, then a savings account or money market account will suit your needs and help you to meet your goal. For any longer-term goal, speak to your bank or an advisor about the right type of investment for your specific needs and timeframe that will balance the risk you’re willing to take and the returns you need to make.