South African investors have a greater choice of investments today than at any time in the past, with equities, unit trusts, property, and a generous offshore allowance allowing us to seek out better returns on our money.Today’s investment options are seemingly endless, yet a lot of South Africans are still piling up cash in bank savings accounts – this may seem like a safe investment, but you run the risk of making very low or even negative returns in the current economy with inflation running high. Here are a few reasons to move your cash out of savings accounts and into more competitive investment vehicles.
The current economy doesn’t favour cash as an investment
Recent reports on the South African economy warn that we are entering a period of Stagflation – this is a term coined by economists to describe an economy with slow growth and high inflation.
For investors, the main challenge of living through Stagflation is ensuring that the value of our money continues to grow, or at least doesn’t shrink. If it sounds bizarre to think of money shrinking, consider this example:
Let’s say that you have R100 000 to invest this year. With inflation of nearly 6% projected for the South African economy, you’ll need a return of 6% just to prevent your money from losing its value to inflation.
In a slow-growing economy, the challenge is to find an investment that will provide you with this growth without too much risk – and unfortunately, a savings account is not the best option.
Most savings accounts are paying just a few per cent per annum for cash on deposit. This means that your money is actually losing value even though you receive this small amount of interest – this is what investment experts call negative returns.
Looking beyond savings accounts
Money in a savings account is usually part of an emergency cash fund or holiday fund – this money needs to earn interest and be easily accessible when you need it.
To earn inflation-beating returns on your money, you might consider placing it in one of the following investment vehicles – after consulting with your financial advisor:
- A fixed-deposit or money- market account
- A unit trust with a low-risk portfolio that guarantees your deposit
- Your bond – if you have an access bond you can reduce your capital amount (and monthly interest payments) with the surplus cash and withdraw some of it at a later stage if required.