A Fin24 reader looking to invest half of her emergency fund seeks the advice of an expert on which investment product would generate the most interest. She writes:
I have R200k in my Absa "depositor plus" account. This money equates to four months of my net salary. I saved it as an emergency fund, though my goal was to save up to six months equivalent. I'm concerned that it's not generating enough lately as the interest is low.
I have never used any monies from this account since I opened it about five years ago and don't plan to, as I have an additional R100 000 in my cheque account. I do have other investments in equities and unit trusts equating to about R300 000.
I request advice on where should I put maybe R100 000 of this money to generate more and still keep the remaining amount as an emergency fund. I am a single parent of 53 years old and my current pension value is around R5 million.
Hester van der Merwe, Wealth Manager for Ultima Financial Planner, and Financial Planner of the Year 2020, responds:
Having an emergency fund is one of the basic principles of sound financial planning. Congratulations on achieving that goal!
The general rule is to keep an amount equal to six months’ expenses in your emergency account, so you seem to be adequately covered. I recommend that you maintain your emergency fund but ensure that it does not grow beyond your requirement. This means that you should calculate the ideal amount to have in your emergency account and rebalance annually by investing any surplus funds in a more appropriate vehicle.
Keep in mind that every product in your portfolio has a specific purpose. The purpose of your emergency fund is to provide cash that is immediately accessible in case of an emergency – not to aim at capital growth.
I further recommend that you do not keep such a large amount in your cheque account since it will most likely not earn much interest. This amount, together with the surplus in your emergency fund, should be added to one of your other investments where capital growth is the objective.
If you need assistance with the choice of investment instrument, it will be best to contact a Certified Financial Planner.
*Questions may be edited for brevity and clarity.
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