Inflation in South Africa has been quite persistent, slowly but surely reducing the value of money. Saving money in a bank account or institution with low interest rates will usually not beat inflation. That means the actual value of your savings decreases with time. Thus, it’s very critical to understand how one should manage savings and investments to fight back against the consequences of inflation concerning attaining and increasing wealth. This paper will explore the reasons behind such a phenomenon while suggesting ways to earn interest and invest wisely.
So Why Are You Giving Your Interest to Your Bank?
Most South Africans keep their funds in traditional savings accounts because they believe their money is safe and the manner is convenient.
These savings accounts give, however, very minimal interest rates that rarely protect your money from inflation. When the rate of interest rolled in is just above the rate of inflation, the actual value of the savings keeps decreasing with time. For example, when the simple initiation rate is something like 2% against an inflation rate of 5% of what the bank would offer, this acts as money losing 3% of its value in any given year.
Banks, in effect, make a killing out of your money. They lend the deposited funds at steeper interest rates and mint bountiful profits. Meanwhile, a fraction of the interest goes to the depositor and hardly helps retain the purchasing power. The system favors the banks more than it does for the individual saver, resulting in a silent transfer of wealth from the public to the financial institutions.
It is also exposed to stresses in account maintenance fees and transaction charges, which could further shave off the value of your savings. With all these small fees adding up over time, the effect comes down to hacking your net returns from savings. For instance, a maintenance fee of R50 a month overpowers growth in savings accounts, especially where interest earned is fractional.
So How Can You Earn Interest on Savings?
If South Africans want to fight back against money devaluation while lying in bank accounts, they must think of lucrative ways of saving. One way could be through the use of high-yield savings accounts. These accrue higher interest rates compared to regular savings accounts. As a result, they can help retain more value for your money. There are a variety of banks and other financial institutions in South Africa that offer high-yield accounts. They all cater to different saving needs and goals.
Another viable option would be to look into fixed deposit accounts. Generally, it pays a better interest rate in exchange for locking away one’s money for a predetermined period. Although this does curtail liquidity to a great extent, it does ensure that returns are much better than any ordinary savings account. The key is to shop around and find one that is suitable to your risking financial goals and timeline in general.
You can also explore money market accounts. Generally, money markets pay interest higher than regular savings accounts and provide limited check-writing privileges. Therefore, they give a nice balance between liquidity and interest earning. A money market account is ideal for anyone who needs a secure home for his or her money but wants an interest rate that is at least somewhat competitive.
South African government bonds can offer formidable attractiveness to investors willing to accept a little risk. One essentially lends money to the government, which repays this loan with interest over the years. Government bonds are predominantly low-risk and will provide an investor with a steady income stream. These characteristics make this investment instrument steadily appealing to most conservative investors.
Finally, one can look at the digital banking and fintech solutions that can reveal new higher interest rate opportunities. Most digital banks and fintechs offer interest rates on savings accounts to their competitive strategy of gaining customers. Most of these platforms charge lower fees and have features that will make your banking experience better and quite innovative.
So, How Can You Start Investing?
Invest to protect and grow your wealth. There are various investment options that people in South Africa can adopt, all of which have different levels of associated risk and potential return. One can create a diversified portfolio at the very start to help manage the risks better and valiantly strive to generate more stable returns for oneself.
Mutual-based funds are perhaps one of the most accessible avenues. They pool cash from a group of people to be invested in a diversified portfolio. This comprises stocks, bonds, and other securities. To this extent, mutual fund investing provides professional management and diversification to minimize the risk of investing in individual securities.
The other popular investment vehicle is exchange-traded funds. These are mutual funds, but they are traded like every other stock on stock exchanges. Thus, they have diversification with typically low fees relative to mutual funds. As many people use it to get instant exposure to the diverse classes of assets, equities, bonds, and commodities offered, one could think of ETFs as working for beginners.
Direct ownership includes investment in stocks and real estate. Stocks offer an owner the potential for high capital appreciation, primarily if invested in companies with solid growth prospects. Real estate would offer income as rent and capital appreciation over time. Regarding the accommodation sector, opportunities abound in the South African property market, especially in the country’s growing urban areas.
Cryptocurrencies have further been viewed as an avenue for investment. Much as they are very volatile, they do guarantee significant returns. It is, therefore, important to diligently research and understand the risks of investing in them. Introduction The existence of platforms such as Luno or VALR has made it easy for people to buy or sell cryptocurrencies in South Africa.
In addition, retirement accounts, such as Tax-Free Savings and Retirement Annuity, are excellent areas for long-term investment. They can increase the growth rate in your investments with remarkable steps because of tax advantages in such accounts. This shall assist you in developing a good nest egg for retirement if applied regularly.
Final Thoughts
Old ways of preserving your money in low-interest bank accounts are no longer very effective at holding on to the value of your savings, more so in an inflationary environment. Thus, ways South Africans can earn interest and wisely invest their money should be prioritized. High-yield savings accounts, fixed deposits, money market accounts, government bonds, and digital banking platforms give better interest rates that would enable one to fight against the effects of inflation.
