MONEY CLINIC | How can I earn more interest on my R300k savings with minimal risk?

A Fin24 reader concerned that he could be earning too little interest on his R300 000 in savings, looks for ways to invest to get out more, with minimal risk.

He writes: 

I'm 64 years of age and have 300k in a bank account earning very little interest. I have been looking for the best interest I can earn with as little as possible risk. 

What do you propose as a good solution?

Michael Rossouw, Senior Investment Consultant at 10X Investments, responds:

It depends on the purpose of this capital. If the purpose of this R300 000 is as an emergency fund, you will probably have to accept the trade-off of somewhat lower growth in exchange for accessibility. The primary objective of an emergency fund is not to grow your wealth, but to protect it from unforeseen circumstances.

It can be extremely frustrating receiving minimal growth on your capital. It is difficult to see that your money is not working as hard as it might. But should an emergency hit you, you will be glad to easily access that extra barrier of protection from the unknown.

Unforeseen circumstances come in many forms, from retrenchments to big medical bills, whether there is a global pandemic in play or not. Having an emergency fund is an important first step to financial security, especially as we start to get older.

Generally, emergency funds are kept in savings accounts, 30-day call accounts and money market funds. This is because they provide steady low growth with minimal volatility. However, if you would like to increase your probability of higher growth you can invest in unit trusts that are not invested only in cash.

Unit trusts with a high allocation to cash and bonds and minimal exposure to equity and property increase the probability of higher growth while not taking on too much stock market risk. 

Once you have ticked off the emergency fund box, you can move on to maximising your other investments, whether that be a retirement fund, tax-free savings account or unit trusts with higher allocation towards equity and property.

The benefit of investing in retirement funds is that, unlike a tax-free savings account or a unit trust that receives only an investment return, a retirement fund receives an investment return and a guaranteed tax return. A retirement fund is one of the best investments one can have. Every year, you can claim a tax refund on retirement fund contributions up to 27.5% of your annual taxable income, up to a maximum of R350 000.

The next step is to start contributing towards a tax-free saving account, where the investment returns are exempt from tax, unlike other investments where returns (in other words, profits) are subject to tax.

You can contribute a maximum of R33 000 per annum (R500 000 over a lifetime) into a tax-free savings account and the growth within it is not taxable (unlike a unit trust, where growth is subject to tax). This allows for more growth to compound your capital, which will grow at a faster rate.

These four steps can be done one by one, or at the same time, depending on your financial circumstances. 

Compiled by Allison Jeftha. 
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