What is the best way to save?

Johannesburg - A Fin24.com user recently asked:

What is the best savings plan? I want to save but the banks do not offer good interest for savings. I don't want a savings policy, because if times get tough and I can't afford it, I stand a chance of losing money.

Jillian Kipling, acsis financial planning coach, responds:

The actual habit of saving monthly is a brilliant one, and this habit is what should be cultivated by everyone who wants to kick-start an investment plan.

What people look for in an investment is maximum return at minimum risk.

There are numerous different types of investments in the market to choose from. Your objectives, understanding of how these investments work, the inherent riskiness involved in them, and your level of comfort with those variables should direct your choice.

Most people start with a savings plan.

Savings plans have a sliding scale of interest earned. Initially this is very low, increasing with larger capital amounts.

A typical 32-day notice account currently pays 0.5% on amounts under R1 000, but up to 5% on amounts of R50 000 and greater. So it would make sense to move your money to a money market type of account once it's above R20 000, where the interest rate is currently about 6.5% but the minimum entry amount is R20 000.

Eventually you will have more than R20 000 saved and have moved to a maximum interest account such as the one aforementioned and will be earning 6.5%.

When will you be liable for tax on that investment as it grows and grows? Currently the tax exemption is on the first R19 000 interest earned per annum (by a single person under 65). A savings amount of R295 000 at 6.5% will earn R19 175, so clearly any amount held in cash above R295 000 will start to attract tax.

At this stage (if not before) it is advisable to start diversifying your assets, which means that you must increase your investment knowledge. After all, you are now a serious investor!

Learn more about unit trusts, property investments, share portfolios and insurance products as well as their tax benefits and costs. These are just a few basic investment types.

Consider unit trusts

Again, most people will graduate towards unit trusts, especially if they don't want a savings policy, so let me explain what they are and how they work.

I guess they appear less volatile than shares because they are not purchased directly from the JSE, but through a bank or investment company.

The unit trust company takes the investor's lump sum (or monthly contributions) and deposits them into an investment "pool". Depending on the type of fund an investor buys into, the investment managers buy shares on the stock market/other assets that are suited to that type of fund.

For example, a pure equity unit trust fund will buy only shares. That particular investment "pool" will hold a portfolio of shares and you, as the investor, will own a fraction of those shares. The unit trust value goes up and down depending on the performance of those shares.

This would be exactly like buying your own shares on the stock market, except that someone trained is doing it for you and you are buying fractions instead of whole shares.