Investment vehicle key for emergency money

2010-10-09 15:05

Having extra money for ­emergencies is very important. Ideally, you should have about three months’ salary set aside for emergencies like retrenchment, medical problems (accidents, hospital admission), car repairs or even family responsibilities (funeral expenses, travel and so on).

The best way to grow your emergency savings is by saving on a monthly ­basis through a ­scheduled payment ­into your investment ­account, which will help create the discipline to save each month.

Once you have some money set aside, though, where is the best place to keep it, assuming you need to get hold of it in an emergency?

Clearly, a long or medium-term investment vehicle is not ideal as you need to be able to access the money at short notice.

You will need to consider various short-term options that can get you the best possible rate of return.

Entry level investment accounts can be opened from only R100 and any amount can be added at any time.

Thanks to compound ­interest, your money can really grow since ­interest is calculated on interest already earned.

Where is the best place to ‘grow’ your money? Should I keep money in my credit card/bank account?
This might seem like a good idea, because you can ­access the money quickly and earn interest on it.

However, both credit cards and transactional bank accounts offer very low ­interest rates.

You would be lucky to get 2% interest in your transactional bank account and most credit cards offer very low interest rates on positive balances (unlike the very high interest the bank charges when you owe money on your card).

You can expect only about 1.25% on a ­positive balance on your credit card, which is way below inflation (currently 3.7%).

Also keep in mind that spending on your card erodes the balance even if you intend to repay the money at the end of the month.

In order to grow your additional funds, you really need to find a financial vehicle that will offer you a return of above 3.7%.

If you do want to save on a credit card then Virgin Money is your best option. Not only does the card have no yearly fees but it pays 4% from the first rand you save.

However, even with a higher interest rate, you need to be very disciplined to save with a credit card.

Easy access means temptation! You could see your savings evaporate if you’re not ­really ­careful.

We know that South Africans lack a strong savings culture, so if you struggle to stay focused and have a weakness for shopping, this is definitely not the best place to stash your cash.

Easy Saving

FNB and Capitec offer Savings Pockets that help you to save. You can link your Savings Pocket to your current account, but keep your savings separate.

FNB allows one Savings Pocket per account, no fees are charged and it currently pays 4.4%.

Capitec allows for multiple “pockets”, so you can have one for emergency savings and another for your yearly holiday. You receive 7% on balances below R10 000 and 5.25% on higher balances.

Bank Your Change
Remember the days when we used cash and then threw our loose change into a jar at home?

Now you can do the same thing when you swipe your bank card.

FNB offers its account holders a "bank your change” savings option, which is really an electronic version of a piggy bank. How does it work? You can select to have your balance rounded up each time you use your bank card. The extra change will then be put into a “piggy bank".

For example, if you swipe your card for R27.50 and you have opted to round up to the nearest R5, then R30 would be taken off and R2.50 credited to your "piggy bank". By the end of the year, you should have quite a nice sum saved up for the festive season without even realising it.

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