Thami Cele, the Head of Savings and Investments, Everyday Banking, Absa RBB, provides clarity and sound advice around saving in current times as South Africans are financially impacted by many financial-related increases.
Q: Interest rates are hiking at a rapid rate. Why is the Reserve Bank doing this at this pace?
A: Global economies have also been experiencing accelerated inflation growth. South Africa is not immune from this trend. The South African Reserve bank (SARB) is taking preemptive action by increasing interest rates. One of the SARB's key mandates is the Consumer Price Index (i.e., inflation) management. The repo rate, and by default, the prime interest rate, is one of the levers that the Reserve Bank uses to achieve effective inflation control and management.
These decisions come with desired and undesired outcomes, depending on which side of the fence you are. For savers, this is great news as returns are improved for any Prime Interest Rate-linked products. On the other side of the coin are those with Prime Interest Rates linked loans/debts, so the impact is adverse as they are forced to stretch their income to service their debts.
Q: What is the best way to save during this interest rate hike cycle?
A: There is no telling how long this current cycle of interest rate increases will last. The SARB makes such decisions on an ongoing basis, taking a multitude of factors into account. We generally encourage people to seek financial advice as they consider how to approach saving and investing. Whilst the decision ultimately rests with you, the consumer, it is always advisable to get expert advice on these matters.
Q: If there is spare cash, should that money be put into the home loan or a savings/investment account, or even in purchasing a property asset for investment?
A: Generally, it is encouraged to have a savings mindset or a habit of saving as we meet debt obligations. That said, there are many considerations; for example, have you already sufficiently saved for an emergency fund, or will you need access to the funds at some point. An Absa Home Loan does allow access to funds that are prepaid. Prepaying your home loan helps reduce your interest obligations and speeds up the repayment period.
The Interest rate differential between Savings and Home Loans also needs to be considered. Any extra income-generating asset (property or business) is always a great idea, as long as you have done your homework.
Q: Is it wise to use a credit card as a savings account?
A: Absa offers a 57-day interest-free period on qualifying credit card purchases. Settling your credit card spend within 57 days of the purchase date means there is no interest obligation for you. It is, therefore, definitely wise to use a credit card under these conditions. However, whilst maintaining a positive balance on your credit card may be convenient, it generally does not result in interest being earned on your credit balance. Simply put, keeping the funds saved in an interest-earning account (savings) is a lot more beneficial.
Q: Where can one achieve a prime rate in terms of savings or investment accounts - and what qualifies a person for a prime interest rate?
A: Interest rates equivalent to prime can be achievable whether saved or invested. It all depends on the purpose, access required, and the amount invested. There are also multiple ways to achieve this through Absa:
- An Absa Fixed Deposit can give you a prime equivalent interest rate should you keep your funds for a period of at least 36 months.
- Using the Absa Stockbrokers tool, you can also invest in equities that can potentially return yields that are much higher than prime interest rates depending on the performance of the market. This is key when you are in a position to take risks for potential rewards. Equities do not guarantee your capital, whereas bank fixed deposits guarantee capital and returns already earned.
Q: What are the important factors when considering how to invest?
A: You must consider the risks and rewards that come with investing (e.g. loss of capital invested, not earning returns to achieving super high returns) and should understand where and how you want to invest, be it equities, unit trusts, locally or offshore etc. Ask yourself whether you are in for the long term and if so, this provides you with a better chance of earning great returns.
Another consideration is an emergency fund. It is always advisable to invest once your emergency fund is solid. Even if this fund is not in the form of cash savings, at least ensure you are adequately insured for protection. Cashing out your investment due to emergencies will only derail your progress and ambitions.
It is also important to do your own research about investing. The buck ultimately stops with you in your financial journey.
Q: How can we educate/encourage children to start investing - especially when they are under peer and brand pressure - and be part of the family wealth-building?
A: Children are generally very impressionable, and you can use this influence positively. The best thing that parents and guardians can do is educate children on saving and investing as early as possible to help them understand the value of money. This is usually around 5-7 years of age, but it can also be earlier or later.
Tricks and tips to consider include:
- Have a separate bank account for children – in their name.
- Let them be part of the family’s financial decision-making when they are old enough to understand.
- Use the language of money management in practical and relevant situations.
- Let children know and understand that money is not infinite.
- Encourage co-contribution to expenditure.
- Watch money management tips with them on platforms like YouTube that they can relate with.
- Make savings a fun thing to do, including playing money games like Monopoly, etc.
- As children grow older and become more independent, continue to elevate these principles wherever possible.
Q: Is it advisable to find an independent financial consultant and review your entire income and savings potential, or does Absa offer this service, and at what cost?
A: We encourage people to review their financial positions frequently, starting with the basics of checking your bank statement. Make sure that you can account for every transaction on your bank statement. Are there surprise expenditures that look wasteful in hindsight? These should be teachable moments for the future.
Absa has Financial Advisors in all its branches who can undertake a financial assessment at no charge, as well as provide guidance on the most appropriate and effective ways to manage your finances. Thousands of people are benefitting from this exercise.
Q: What investment vehicles does Absa offer?
A: Ultimately, every investment vehicle will be determined by your goals and where you are on your journey towards achieving those. Absa has multiple investment vehicles. However, we always encourage customers to engage our Financial Advisors for expert advice before making any decisions. This service is FREE of charge. Options available from Absa include:
- Start building an emergency fund through a range of Absa Savings and Investment products that are available on all Absa platforms (branch, voice and digital).
- Want to invest long-term for retirement? You may want to consider investing in equities through the Absa Stockbrokers online platform, Unit Trusts through Absa Advisors, and Tax-Free Savings and Investment accounts through Absa Online, branch and/or Absa Advisors.
Q: What are some of the other important money habits and considerations?
A: It always starts with Ambitions / Dreams. What are your dreams in life? Do you know that they will most likely require financial obligations? It is therefore important to plan and action your journey toward your dreams, less they become pipe dreams.
Budgeting. It’s mundane, boring and “time-consuming”. However, this is the most important discipline to adopt. This is where you get to create a personal relationship with your money. You are the watchdog of your finances!
Time for Finances. We always achieve the things we give attention to. Investing your personal time to review your finances is the greatest gift you can give your financial well-being.
Build an emergency fund. This is protection against unplanned events.
Paying yourself first. People sometimes forget the concept of rewarding themselves first for hard work done. This is a very fulfilling habit if approached with discipline and consistency.
Saving for your assets. This could be saving for a house deposit, moving from house to house, transfer costs, starting a business etc. These are costs that can be the difference between homeownership being a joy or a source of unhappiness.
More Income. Always look out for more income opportunities (e.g., starting a side business where permissible). This is also a form of investment. There comes a time when you have exhausted all options in cost management and still need more money. Now imagine you have an emergency cash buffer and a big opportunity presents itself, such as buying a business or investing in stock. This would give you an opportunity to participate in building your wealth.
Writer : Kerry Dimmer