The best place for your emergency fund

The best place for your emergency fundEvery financial plan should start with an emergency fund. Even if you have debt, before you start focusing on accelerating those repayments, you need to first build up an emergency fund. An emergency fund is what will stop you going back into debt.

Ideally you should build up three months’ worth of expenses, but that takes time and commitment. At the very least you should start with R10 000 and build it up as you get bonuses or extra cash.

An emergency fund needs to be accessible, but not too accessible, to prevent you from being tempted to use it for non-emergencies.

The worst thing you can do is leave your emergency fund in your current account. Apart from easy access, you won’t be earning any interest. You need to select a separate investment account that earns a better interest rate and keeps the money separate from day-to-day expenses.

To keep your banking simple, it is easiest to select an appropriate investment account offered by your bank. Rates depend on how much you deposit and how long you lock it in for, so it is important to do your research on the best solution for your needs.

You could keep the money in an investment account which is accessible within 24 hours. This would allow you to access the funds for an emergency that requires you to have money straight away, but in most cases, we have some time to pay the bill.

In that case, a 7-day notice or even 32-day notice account provides a good solution by providing both a higher interest rate and some distance between you and your money. A one-month fixed deposit is also an option as you can just then roll it over at the end of every month if you do not need the money.

One of the best options is a flexible fixed deposit where your money is fixed for a period, but you can access some of the funds immediately. This would be ideal once you have built up a larger emergency fund of at least R20 000, as half would still be accessible within 24 hours. Absa has an interesting option where you can access any percentage of the investment but the interest rate changes accordingly.

You also need to consider that fixed deposits do not necessarily allow you to add to the balance during the fixed term. In this case you would want to build up a balance in a shorter-term investment and transfer to your fixed deposit at the end of each notice period.

We did some research on what the banks are currently offering for short-term deposits. This is based on a balance of R10 000. In most cases interest rates increase for higher balances.

We found that African Bank has very high interest rates as they are focused on raising deposits. You need to do the maths to see if an extra 2% on R10 000 (R200 per annum) is worth opening a separate bank account. The rates do not increase with higher balances as is the case with other banks, so the differential narrows the more money you have to deposit.

Interest rates based on a starting balance of R10 000

Access money within one day

Absa TruSave: 3.45%
Absa depositer plus (minimum R15 000): 5.2%
Capitec: 4.85%
FNB Savings Account: 5%
Nedbank JustInvest: 5%
Standard Bank PureSave: 2.35%

Access after 7-days’ notice

Absa notice select: 5.4%
African Bank notice account: 7.01%
Standard Bank notice deposit: 2.85%
Note: FNB minimum is R20 000, Nedbank and Capitec do not specify a 7-day notice account.

Access after 32-days’ notice

Absa notice select:  5.5%
African Bank notice account: 7.49%
FNB 32-day notice: 5.5%
Nedbank 32-day notice: 5.75%
Standard Bank notice deposit: 4.45%
Note: On all Standard Bank notice accounts you earn an extra 0.15% if you open via online banking.

One-month fixed deposit

Absa notice select: 5.5%
FNB fixed deposit: 5.70%
Nedbank fixed deposit 6.05%
Standard bank fixed deposit: 6.45%
Note: Absa allows the customer to select access to a portion of the funds for any notice select product. The rate depends on the portion you select for accessibility. In this example we assumed no accessibility
Note: African Bank fixed deposit only starts at 3 months, Capitec only starts at 6 months.

Fixed deposit with accessibility (you have access to a portion of your money within 24 hours)

Nedbank EasyAccess: 3 months fixed deposit: 6.20% or 6 months: 6.35%
FNB Flexi Fixed deposit:  3 months 5.25%, 12 months 5.5%
Absa dynamic fixed deposit: 6 months 6.45% (assuming access to 50%)
Standard Bank Flexi Advantage: 3 months 5.45% and 5.7% on 6 months
African Bank: Only offer 24-month deposit period but you can access 100% of your capital. The interest rate depends on how long you leave the funds for. You start with 6.55% but increases to 8.96% if untouched in 24 months.

This article first appeared in City Press.

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