Which investment product is right for you?

Most people think the word ‘investment’ is associated with lots of money. For the average employed South African, making enough money to pay all the bills and still find a little to save every month is already a challenge. It’s even harder if you have a family to support, and investing can start to look like an impossible pipe dream.

But that view stems from a misunderstanding of what an investment is, and the different ways to invest. Here are 3 popular misconceptions about investment:

  • You can only start investing if you’re rich and debt-free.
  • You need a large lump sum to make an investment.
  • When you invest your money, it’s locked away for a long time and you’ll have no access to it.

The reality is that you can start investing with just R250. And while some investments do require a lump sum to be invested for up to 5 years, we offer several investment products that combine competitive interest rates with various access options, starting from just 24 hours’ notice.


How does investing work?

It’s hard to define the difference between the meanings of the words ‘save’ and ‘invest’. For practical purposes, though, most of us tend to think of savings as money we’re not using right now but have available for an emergency. Or you could be saving up for something in the future – whether it’s a holiday, a new device or appliance, the deposit on a car or a house, or even your retirement.

This is when ‘saving’ should turn into ‘investing’. You now have an investment goal, and the aim is to grow the money you save as quickly as possible towards realising that goal. If it’s a long-term goal, you can afford to tie up your savings for longer in return for a better interest rate and higher growth. Apart from the question of access, the investment products you choose will depend on the amount you have available to invest, how long you wish to invest it for, and whether you want to be able to add money to your investment.

You can identify the best product for you by applying those 3 factors to a specific investment goal. That will help you decide whether you need a term or notice investment.


The difference between fixed-term and notice deposit investments.

A term investment requires you to invest a lump sum for a specified term – from one to 60 months. You usually do not have the option of adding more money during the term. When the term is over and the investment matures, however, you can reinvest the money – or a larger amount – for another term.

 

If you have 3 to 6 months’ salary saved up, you have a financial cushion when disaster strikes

 

On the other hand, notice deposit investments can be opened with as little as R250, and you can make monthly recurring payments into the account or add a payment whenever you have money to spare. Your money is more readily available in an emergency (depending on the notice period), but the trade-off is usually a slightly lower interest rate.

You could consider diversifying your investments with a combination of notice and term investment accounts for different investment goals. Let’s look at some of the accounts that match certain goals.


Emergency savings accounts

As the name suggests, your emergency savings need to be available at short notice. If you have 3 to 6 months’ salary saved up, you have a financial cushion when disaster strikes, whether it’s a medical emergency, unexpected car or home repairs, or losing your job. But that’s a lot of money to keep on hand in an ordinary savings account, earning interest that barely matches inflation, ‘just in case’.

However, if you kept one month’s salary in a Nedbank JustInvest Account, the money would be available to you at one day’s notice, to cover immediate needs. JustInvest also offers tiered interest rates, so the more you have in the account, the higher your rate will be.

The remainder of your emergency funds could be invested in a Nedbank 32Day Notice Account, where you earn competitive rates, but you need to provide 32 days’ notice to access your funds.    


Long-term tax-free investments

The interest you earn on most investments is taxable. Luckily, you’re allowed to save up to R36,000 a year, and R500,000 over your lifetime, in tax-free investment solutions (TFIs).

You could invest a lump sum not exceeding R36,000 in a Nedbank Tax-free Fixed-deposit Account. If you don’t have a lump sum to invest, you can open a Nedbank Tax-free Savings Account for as little as R500. If you save in a tax-free savings account for a year, you can then transfer those savings (up to R36,000 a year) as a lump sum into a 12-month tax-free fixed deposit. If you repeat that process every year, you will maximise your returns.

 

The longer you stay invested, the more your money should grow

 

If you withdraw from your tax-free fixed-deposit account before the end of the one-year term, you’ll pay penalties. In contrast, you can make withdrawals from a tax-free savings account at one day’s notice without penalties, but it’s usually not a good idea to withdraw money from TFIs early. You cannot ‘replace’ this money later – if your total deposits into the account then exceed your annual or lifetime limit, the excess deposit amount is taxed at 40%.

That’s why it’s best to use TFIs for long-term investment goals. Many investors make them part of a retirement portfolio – you can maximise your tax-free growth over 30 or 40 years and end up with a substantial amount when you do eventually withdraw the money.


How to make the best of compound interest

The longer you stay invested, the more your money should grow, and the faster that growth becomes. The reason for this is compound interest. Depending on the type of investment, the interest your money earns can be calculated daily, monthly, quarterly, every 6 months, or annually. Likewise, that interest will be added to your account balance on a regular basis.

Also depending on the type of account, you may be able to withdraw that interest regularly and spend it, but here’s why it’s a good idea not to: if you leave that interest in your account, it is included in the balance on which the next interest payment is calculated – that’s know as compound interest. So, if you don’t withdraw from your investments, you end up earning interest upon interest, and your money grows at a rate that accelerates over time. You can learn more about the magic of compound interest here.

As you can see, if you have any money at all to save every month, there are ways to invest it and make it grow faster. Investing gives you peace of mind and reduces stress about your future financial needs. The sooner you start, the more time your money will have to increase, earning interest upon interest. The Nedbank Money app is a powerful tool that can help you on your investing journey by allowing you to take up investment products, watch your money grow, set up recurring payments, place notices when you need to withdraw, and reinvest seamlessly.

View our investment products and contact us on 0800 555 111 if you need assistance.

This information is not financial advice. If you need financial advice, please approach your financial adviser. The goal of this article is to simplify the topic of investing and share information for beginners and those who have already begun investing, and to help them gain a better understanding of Nedbank’s investment products.