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Investing money makes Rands and sense
2006/03/16
It’s the beginning of another year, time when new year’s resolutions have been made, and are kept for just a few days. The year-end bonuses, thirteenth cheques and tokens of jobs well done, have all been spent and for some, it barely touched sides, others indulged in some retail therapy, and the wisest of all invested the money, resolving not to touch it until a specified date.
There is a perception that investing money is a luxury that can only be indulged in once debts are paid, and then only if you have access to brilliant financial expertise. Both are fallacies; investing money is actually quite simple and as we all know, will yield returns in the long run.
The first and most important thing to understand is that to invest money and get something worthwhile back, you have to put the money away and not touch it for the agreed period, otherwise, it can’t grow. Money you invest has to be money that you don’t need to live on – it’s not grocery money, nor is it the reserves in case of an accident. To realise the value of investing you need to say goodbye to it until next month, next year, or for the next 60 months depending on the investment period.
Next, answer some critical questions. How much do you have to invest? This is a critical question since the money you invest cannot be money you will need anytime soon. Obviously, the more you are able to invest, the more interest you will accrue. What type of return do you expect to achieve reasonably? How much risk are you willing to take, meaning, can you afford to lose all this money? Some investments are riskier than others – a good rule of thumb is: unless you can lose it all, don’t bank on high-risk investments. What are the tax consequences to investing? And how will inflation impact your investment? Financial advisors can help you answer these questions best and are accessible at all financial institutions. Most financial institutions (banks) offer some variety of the following investment options, although they differ slightly, so shop around (easiest done online).
A notice deposit account – this investment account offers a tiered competitive interest rate and you can access your money with only 24 hours notice, after an initial period of approximately 32 days. This means that the interest you earn is protected for 32 days against a drop in the interest rate and if interest rates increase, a higher rate applies immediately. Read the fine print – a drop in the interest rate will result in a drop in your earnings, after the initial 32 days. Usually, a minimum deposit of R1000 is required and must be maintained.
A fixed deposit account is great if you have a lump sum that you know you will not need to access for a specific period of time – a minimum of a month and a maximum of 60 months. The interest rate is guaranteed for the term of the investment – i.e. it’s fixed for the period, which makes it relatively safe. Usually, a minimum deposit of R1000 is required.
A 6-month fixed deposit account, usually allows you access to a portion of the money you invested (capital) – like 30% of your initial capital over the specified period. This option comes with a market-related interest rate and offers 100% security and guaranteed returns.
An investment account directly linked to the bank’s Prime Rate – this account usually requires a minimum of an 88-day investment and a maximum of about 60 months. The number of additional deposits is limited as is the total amount you can deposit over the investment term – usually totalling no more than about 30% of the original capital.
A 12-month fixed deposit account usually allows you access to a portion (around 30%) of the capital invested, at the start of the period, over about 3 withdrawals.
There are many more options. Just remember that investing is smart, but do so wisely. Understanding all the options available through different financial institutions is key
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