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Where to invest emergency cash

Fin24.com's Money Clinic has invited users to share their financial headaches.

Paul asks: Where would the best place be to keep a savings amount of about R10 000? It's currently invested in a Money Builder account at Absa.

I would like to have immediate access to this money in the event of emergency or payment on motor vehicle repairs. Is there, however, a better place/product to keep this money?

Money Clinic's diagnosis:

The Money Builder account currently offers an annual interest rate of 8.90% on R10 000. With inflation running at almost 11% a year, it means that - even without considering bank costs - the value of Paul's money is actually shrinking.

Paul could get a better rate of 9.95% if he invested in an Absa notice deposit, but he would have to wait 32 days before he could get his money.

Another alternative is to shop around and look at some of the smaller financial institution's banking offerings.

Virgin Money's credit card, for example, offers a 9.5% interest rate and no annual card fee. The microlender Capitec Bank offers an annual interest of 11.5% on its accounts and low banking charges.

Another option is an investment in the money market. Money market products remain one of the better investments for emergency capital because it offer you a relatively high return - and you are able to withdraw your money immediately, says Hermann Labuschagne of Dynamic Wealth.

Money market products invest in instruments that basically lend your money to government and other institutions, which undertake to repay the whole amount plus a fixed percentage interest.

The interest is usually higher than on a savings account and the money market is almost risk-free. There is a very low possibility that you will lose your money.

Some banks like First National Bank and Standard Bank offer money market accounts for investors with less than R20 000 in cash. Getting your money out is relatively easy.

Paul can also choose to invest in a unit trust that invests in the money market or bonds. Most local money market funds delivered growth of more than 12% the past year. It should take between three to five business days from selling his units to receiving the money in his bank account. The annual fees are usually between 0.29% and 0.6% of his total investment.

"But is important to realise that in the long run, money invested in the money market quite possibly won't keep track with inflation and that it should only be seen as emergency capital investment," says Hermann.

According to one study, there is only an 80% chance that the investment in the money market will deliver a return equal to inflation.

In the long run, the stock market offer the best growth = but over a short period the market will be too volatile to guarantee that Paul won't lose some of his capital.

- Fin24.com

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