What are the most popular savings vehicles for South Africans, and what are their pros and cons? We asked two financial planning professionals.
There are plenty of ways to save and invest in the market, but three of them are particularly popular with South Africans. Before you draw all your hard-earned savings and stick them somewhere just because everyone else is doing it, read this breakdown of when to save where, and why.
First you need to ask yourself why you're doing it. The decision should largely depend on your end goal, whether you'll need instant access to your money or not, and what your appetite for risk is (bigger risks often come with bigger rewards, but the risk part doesn't go away).
Financial-planning professional Gerald Mwandiambira (Mwandiambira) says that it's also important to distinguish between investing and saving. "Saving is defined as money put aside that may be needed in the short term. An investment is money set aside to grow," he says.
"Saving preserves your capital balance and may grow slightly, depending on the interest rate linked to your account, whereas investing is a trade-off between the risk of diminishing or losing your capital balance and much larger potential growth."
Stokvels are a savings or investment tool, with nearly 40% of South Africa's adult population involved in about 810,000 active stokvel groups. That's over 11 million people in stokvels collecting an estimated R50 billion annually, according to the National Stokvel Association of South Africa (NASASA).
Financial education specialist Palesa Lengolo says that stokvels are popular because they're a proudly South African way to save and invest that has been passed down from generation to generation. She adds that stokvels have evolved as people have become more financially literate, with members realising the power of their pooled wealth and the potential for it to create wealth, rather than satisfy short-term savings needs. "A stokvel is a vehicle for savings, investment or funding," she says. "Whereas traditionally stokvels were a short-term savings solution, they've now become 'middlemen' in more complex plans, with the pooled resources being passed on to investment managers who invest the money in longer-term, registered funds.
"There are many benefits to being part of a stokvel, but principally the accountability and pooling of knowledge over resources are key," says Palesa. "When you're pooling financial resources, you're accountable to each other because everyone must pull their weight. And then when it comes to creating wealth, the spirit of ubuntu is prominent, with people from the group bringing their skills to bear – like legal, accounting and entrepreneurial minds – to aid members, or the group as a whole."
Mwandiambira says that apart from stokvels, Retail Savings Bonds hold a particular appeal as savings vehicles at the moment because they offer significantly better returns than interest-based accounts, especially with interest rates being as low as they are currently.
So how do they work?
"You're effectively lending money to the government and in return, they pay you great interest rates on your bonds – well above money-market rates," Mwandiambira says. "These are medium- to long-term investments, not savings accounts, because they have maturity dates of at least 5 years and you won't be able to access the money before then."
While most South Africans have savings accounts with their banks, the low interest rates and high fees make them more like daily transactional accounts. So rather consider using a 32-day interest account.
"When saving in the short term or building up an emergency fund, 32-day notice savings accounts provide flexibility and some growth through interest – as long as your goal isn't linked to growing your money too much," says Mwandiambira. "The money is accessible, but the 32-day wait is a deterrent to impulse spending."
Another popular savings vehicle is a tax-free savings account. Mwandiambira says that while they can also be used for emergency funds, they can help grow money better – with the benefit of not being taxed on growth, as long as savings don't exceed R36,000 annually (limit increases annually) or R500,000 in a lifetime. "With a tax-free savings account, you're investing in underlying assets like equities, which deliver better growth while still offering flexibility – these are perfect for things like saving for your child's preschool fees.
Get help navigating your way around the savings accounts available on the market and finding which one best suits your needs with our savings accounts comparison tool. It will enable you to compare the minimum deposits required for each account, interest rates and more. Find your perfect savings and investment options today!
This article is for informational purposes only and should not be construed as financial, legal or medical advice.