Saving – Saving for an emergency, and other stuff
Once you’ve contributed towards your retirement fund you should also put some money away for a rainy day. In normal speak “a rainy day” is called an emergency savings fund.
Saving is setting money aside for things you need to pay for in the near future. It could be for fun things like a flat-screen television or a holiday or more boring things like paying a mechanic if your car breaks down.
Typically, savings are accessible and unlikely to earn interest that beats inflation. But, if you have savings, you don’t have to go into debt to pay for the things you want or to cover unexpected expenses.
Ata wants to know…
What is interest?
Interest is like paying “rent” for lending or borrowing money. If you save money in a bank, the bank pays you “rent” or interest for borrowing the money from you.
The easiest way to save is to set up a monthly debit-order amount that goes off on the day after your salary arrives. In that way, you adjust to getting by with less money.
Ata wants to know…
Why can’t I just keep my savings under the mattress?
You might think it is safe to keep your extra cash in a box so that it can’t fall into the hands of internet hackers or scammers, but your money loses value this way because it is not earning interest. This means your money is not keeping up with inflation.
In short, inflation refers to the general increase in the prices of goods and services in the economy. In South Africa, inflation is measured by the Consumer Price Index. Currently, inflation is at about 7%. This means that if you keep your money, say R500, under the mattress, after a year its value, also called buying power, will have decreased to R465.
Your money can “fight” inflation by earning interest. If you saved the R500 in a savings account for 12 months with an interest rate of 8%, it would be worth R540.
Banks have various types of savings accounts that can be divided into two broad categories:
Immediate access (or flexible) or access with notice. “Immediate access” means you can draw the money any time you want to. “Access with notice” means you must first give notice to the bank that you want to draw money and then you have to wait for a certain period.
Factors to consider when deciding what type of savings account to open:
Interest rate? This refers to how much interest your money receives per year – it typically varies between 3,45% for a flexible savings account and 8,25% for a fixed deposit account (providing it stays put for 12 months).
Minimum starting amount: This refers to how much money you need to have to open the account. Some banks require as little as R100 while others might require at least R10 000.
Notice period: This can vary from being able to draw the money immediately at an ATM, to 24 hours, 7 days, or 32 days that you have to give notice before receiving the money.
Deposits: Most accounts allow you to make regular deposits, but some allow just a one-off deposit.
All the different savings options can get confusing. The rule of thumb is that the easier it is to access the money, the lower the interest rate. First, decide what you are saving for. For example, if you want to set up an emergency fund, opt for a savings account with immediate access.
Did you know?….
Temba opens a saving account as an emergency fund and deposits R500 every month. His bank offers an interest rate of 3,5%. After a year he has saved R6 000 and earned an estimated R110 interest. It’s not much, but when his son needed a new cricket bat costing R1 000 in January he could easily withdraw the money and pay the sports store in cash without going into debt.
If you are saving for something that you do not immediately need, like a new lounge suite or a second-hand car, you can opt for a fixed deposit account with a waiting period, which usually has a higher interest rate.
Did you know?….
Sibusiso wants to buy a second-hand car for his son in two years’ time. He opts for a 32-day fixed deposit account with an interest rate of 7,95% and a minimum opening deposit of R5 000. The account also allows him to add money to the account, and he sets up a monthly debit order of R500.
After a year Sibusiso earns R613 in interest and has a total of R11 613 in his bank account. After another year he earns interest of R1 139 and now has a total of R18 752.
R5 000 + (R500 x 24 months) + (R613 + R1 139) interest = R18 752
By saving for two years Sibusiso made use of compound interest. That’s interest earned on interest. In the first year, he earned interest on R11 000, but in the second year he earned interest on R11 613.
Ata wants to know…
What is the difference between a money-market and a savings account?
Most banks also offer a money-market account as a short-term savings vehicle. A money-market account works much the same as a savings account in that you have immediate access to your money. With a money-market account, the bank invests the money in a variety of low-risk assets. As a result, the interest rate might be incrementally higher than a savings account. However, bear in mind most money-market accounts have quite a high minimum deposit, usually starting at R50 000 to R100 000.