Personal-Finance

Where shall I put my cash for four years?

2017-06-30 13:50

ELLIOT WRITES:

I have R500 000 in a cheque account that I will not need to use for the next four years. What are the disadvantages of keeping cash in one’s bank account instead of investing in a share portfolio?

CITY PRESS REPLIES:

When it comes to selecting the correct investment, you need to understand the different types of risk and how risk changes with time. Over the longer term, the risk is that your money does not keep up with inflation and your R500 000 buys less in five years’ time than it does today.

Although we don’t think of that as a loss, that is exactly what it is – you have lost your buying power. That is the problem with investing in a bank account – it doesn’t keep up with inflation and you will also be paying some tax on that interest. This is especially true of a cheque account, where the interest is virtually zero.

The stock market grows over time simply because companies grow profits each year and, as they do, so the value of the company increases.

In the short term, there may be external factors that affect the share price, so the company may be trading at a price that is less than it is worth – that is the short-term risk.

For this reason, you should not invest in a fund that has exposure to shares unless you know you can leave the money for at least five years. If you need the money in four years’ time, you may want to limit your exposure to the equity market, but have growth to keep up with inflation.

An example would be a lower-risk fund that has a maximum equity (share) exposure of 30%. These are usually called low-equity unit trust funds.

The aim of these funds is to provide some outperformance, but also protect your capital. You would earn a mixture of interest and capital growth, which would be a bit more tax efficient than only earning interest.

There is also the RSA Retail Savings Bond, which is paying 8% for a three-year fixed rate, which is guaranteed. This is the highest interest rate in the market at the moment.

It is worth speaking to a financial adviser about how this R500 000 fits into your overall financial plan. For example, do you really need to access the full R500 000 in four years’ time? If not, you may want to take a longer view on a portion of the funds while keeping some more accessible. Now is a good time to get advice.

TANDUXOLO WRITES:

I am a 22-year-old student currently doing my in-service training, which will end in February. I have total disposable income of R2 200 a month. Through City Press’ articles, I have been introduced to the world of investment and I want my money to grow. Should I invest in property and what is a financial adviser?

CITY PRESS REPLIES:

It is great that you want to start using your disposable income for investing – the earlier you start, the better. However, you need to have a holistic plan in place. Here are some points to consider:

Put money away for an emergency: Good intentions can be ruined when one is faced with an emergency. This is one of the main reasons people take on debt, so you should start by putting some money into an emergency fund.

Try to save at least R10 000 in a high-interest bank account where there is no risk to your money.

Building up a nest egg: Property can be a great investment and we will be featuring a reader who has started a successful property business next week, however, you need to know what you are doing – and you need to do your research. You also need significant capital to start.

Once you have built up your emergency fund, consider investing in a low-cost, tax-free savings account for the next five years.

This will help you build up capital should you wish to buy a property or start a business – or you may just want to keep adding to the investment.

A financial adviser: The right financial adviser can be a great partner in helping you formulate your financial strategy and continue advising you over time as your plan grows and changes.

Increasingly, there are financial advisers who work on a fee basis so that they can give you advice irrespective of how much you have available to invest.

These advisers understand that this is a long-term relationship and not just based on a one-off commission sale.

The Financial Planning Institute of Southern Africa is a good place to find a referral (fpi.co.za).

Be careful of schemes: When you are young, there may be the temptation to invest in a scheme that your friends say will make you rich overnight.

These are invariably scams and, in the end, you lose all your hard-earned money. Money is made over time through investing and through hard work.

No one can offer guaranteed returns above that of the current interest rate.

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July 23 2017