MONEY CLINIC | I have R36k per month to invest for 2 years. What should I do?

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The earlier you start to save, the more you will benefit from compounding interest and growth.
The earlier you start to save, the more you will benefit from compounding interest and growth.
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A 23-year-old with a net position of R36 100 to invest monthly into a high-interest investment product seeks advice on RSA bonds.

He writes:

I am 23 years old. I recently graduated and began formal employment for a US company with operations in SA. 

I am debt-free and have day-to-day expenses of R5 000 per month and a savings goal of R5 000 per month for emergencies. My monthly expenses are, therefore, R10 000. 

This leaves me with a net position of R36 100 per month that I am looking to invest into a high-interest investment product at a maximum of two years, as by then, I expect to take on debt such as a bond and a newer car. 

I would have liked to invest in a TFSA but that would not be possible as it is capped at R36 000 per annum (while my intended capital exposure is R433 200 per annum).

I'm looking at investing in RSA bonds on the fixed rate option for two years, but I am sceptical due to the current fiscal position of National Treasury and the possibility of further ratings downgrades or defaults that could impact the security of my investment. 

I have also considered a fixed deposit, but that requires a lump sum principal amount whereas I am looking to contribute the R36 100 monthly. I have learnt that the RSA bond allows capital injections but this would run independently of the initial investment. 

Would it be advisable to take the risk and invest in the RSA bond or rather consider purchasing stocks on Easy Equities that have a strong outlook and sell them after two years? 

Gareth van der Merwe, director, wealth manager and fiduciary specialist at Resolute Wealth Management responds:   

Firstly, well done on taking the first step to securing your financial future. The earlier you start to save, the more you will benefit from compounding interest and growth.

As you mentioned, one can only contribute a maximum of R36 000 into a tax-free savings account every financial year because all growth is completely free of any taxes. However, you can nominate beneficiaries on certain platforms, which is advised, and you are generally not limited to how much local or global, or asset class exposure you can have within this investment. Therefore, the tax-free savings should still form part of your long-term investment plan going forward.

As you can make lump sum contribution of up to R36 000 per annum into a tax-free savings account, as opposed to monthly contributions, I would recommend you do open a tax-free savings account with your first month’s contribution available, and then again in March 2022, which will be the new financial year, and every March thereafter.

You can make a lump sum contribution into your tax-free investment in order to ensure that you maximise the benefit of this investment being completely free of any taxes - as long as you adhere to the annual limit of R36 000, and the lifetime limit which is currently set at R500 000.

For the funds you would have over and above the contributions to the tax-free savings account, it is important to consider both the investment vehicle you use when you invest, as well as the asset classes you will invest into, such as bonds - which you mentioned.

As you may want to access a portion of your savings after a two-year period in order to put a deposit down on a property or a car, it is important to ensure that you make use of an investment vehicle that does not restrict access to your funds and does not impose penalties should you stop or reduce contributions, or want to access a portion or the full value of your funds.

With regards to what asset classes to invest into: although bonds can provide a good opportunity, the future is unknown and I recommend diversifying your investment across the different asset classes of cash, bonds, property and equities, both locally and globally, which will help to reduce volatility and protect against a weakening rand over the longer term. 

The weighting of the asset classes and the local or offshore exposure would largely depend on the investment horizon expected. A person who is expecting to have a longer investment horizon of five years or more should have a higher weighting to more aggressive asset classes such as property and equities, with a higher offshore weighting. As this expected investment horizon becomes shorter, so the exposure to the aggressive asset classes should reduce, while exposure to more conservative asset classes such as cash and bonds should be increased with an increased exposure to local assets. 

For your funds earmarked to be invested for a maximum of two years, I would recommend a more conservative approach, which will have a smaller weighting to property and equities, and a higher weighting to cash and bonds, with a higher local allocation. This is likely to provide a higher return than what would be achieved by money market over the two-year period, while managing the level of risk.

Questions may be edited for brevity and clarity.

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