Question:
I have some money split into three savings accounts and since the interest rates have dropped I am not getting the same return.

What is a good investment option for one year?

Answer:
It is sometimes said that every silver lining has a cloud. For those of us earning interest (and not paying it) this is certainly the reality we have been left with after the recent drop in interest rates. So where should we now be investing our cash investments?

If your objective is to get a 'safe', cost-effective one-year investment return, a good place to invest would be cash. Unfortunately, when rates are low, this is the price we pay for security. You can mainly look at money market funds, fixed deposits and bank account interest rates to find the best available rates, but they will tend to be pretty similar (except for some bank accounts, which have shockingly low interest rates). Your bank will be able to give you a clear idea of what their best going rates are.

It is important to remember that the first R21 000 of interest you earn will be tax-free (R30 000 if you’re over 65). Any interest above this amount is taxed at your marginal tax rate (the highest rate you qualify to pay on your tax table). This means that a one-year investor may find that, after taking their tax exemption and the low cost of cash investment into account, their return will still be pretty good, in spite of lower interest rates. For those of us earning big amounts of interest, it could, however, mean that our after-tax interest returns could be lower than inflation.

By looking toward more 'risky' (or volatile) asset classes, our returns could be better but we will also need to accept that we stand a reasonable chance of losing money over short investment terms (typically terms less than five years). We have seen this in shares and property over the last year. The reason why people still choose to invest in these asset classes is because they give us higher average returns over time.

You would also need to consider if you have any debt. The reason for this is that it makes little sense to see how much interest we can earn if we are paying much more interest elsewhere. In such cases, paying off your existing debts — especially when interest rates are low and you can make the biggest dent in them — is a much more logical decision. When we make extra payments into some accounts like our bonds or cars, we can also have the option to draw this capital out if we should need it later (your banker will be able to tell you how you can do this).

So the key lessons we can take away from the above discussion are as follows:

1. If you want to make a short-term investment and have no debt, your only safe bet is cash. Shop around to find the best rates, but do not expect them to be hugely different.

2. If you are earning a lot of interest, it is possible that you are losing money after taking tax and inflation into account. Although this could be a reasonable trade-off for short-term security, this will become very costly for long term investors.

3. If you want a low-risk investment, your investment period is possibly your most important consideration. Over short periods, cash is the safest and a share-based strategy is the most risky. Over the long term (when measured against inflation) the opposite is true. By combining different asset classes you will be able to get returns that will allow you to achieve your objectives at a level of risk you can sleep with.

4. If you have debt, 'saving' the interest you have to pay on it by paying it off will almost always put you in a better financial position than saving the money in an interest-earning investment.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals’ personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

If you would like acsis to put you in touch with an independent financial planner, click here!

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