Emergency Fund aka How this site was born
Over a number of months I had been putting a small portion of my salary into our emergency fund. This is the fund, which will keep us going in case I lose my job, car breaks down, or the family goes to the dentist. We are not covered by our medical aid for dentist visits & believe me dentist visits can be painfully expensive - pun intended!
Rather than keep our savings in a separate cheque account, I opened a Standard Bank money market account online & deposited my money there. This worked well as some interest was accruing in the account daily & paid into the account automatically on a monthly basis (if your balance is over R20 000).
Putting away small amounts of money every single month automatically helped me grow my emergency fund to an equivalent of one, then two and eventually six monthly salaries. I had set up a debit order on the same day as I got paid to automatically move a small amount into the family emergency fund. The automatic part was important. I did not have to think about it & since the money was taken out of my day-to-day savings account immediately after I received it, I was also unable to spend it. So over time, I actually managed to save six months of salary. It took time, but it was a lot less painful than I had originally thought. I realise now that I should have started sooner. If you have not started your emergency fund yet, the best time to start it is now.
Taking your emergency fund to the next level
I had invested my money into a Standard Bank money market account, which was earning some interest on a month-to-month basis. The interest varied depending on SA's prime rate - but was far below prime & crucially below inflation. This meant the emergency fund was losing buying power on a daily basis since it was not keeping up with inflation.
I decided to take action. Instead of keeping 100% in the money market account, I was going to invest a portion of it (+/- 30%) in Fixed deposits. Fixed deposit rates in South Africa are well above inflation. Here was an investment strategy which allowed me to keep the buying power of the emergency fund, without needing to add more money to it.
The search for the best savings rate
So I started on a journey to find the best fixed deposit rates in South Africa. Googling the term 'best fixed deposit rates in South Africa', I noticed a number of promising ads from banks offering anywhere between 9.5% to 13.3%. Yet, I could not help but notice that star (*) and the infamous "terms and conditions apply". I dug abit deeper and came across a number of articles online, including:
- "When 13% is not really 13%" - MoneyWeb
- "Is Finbond really paying 15% interest" - MoneyWeb
- "Beware of Absa's 13% interest rate fine print" - MyBroadband
Eish!!! The bottom line was this - The banks could not be trusted with their advertised rates. You see, there are different ways or methods to showcase the interest rate a bank is offering. When adverts are run (as in the articles above), banks often quote 'simple interest'. Simple interest is not an accurate reflection & should be disallowed to be used. Here is a great excerpt from an article on iol.co.za
Mr Bloggs, a pensioner who is battling to make ends meet each month on his savings, is drawn to a big red Absa advertisement in the newspaper: 13% interest on a five-year fixed deposit.
“That’s fantastic,” thinks Bloggs. “That’s double what I’m getting in my unit trust fund. I’ll withdraw my money and put it in the fixed deposit.”
He phones Absa's call centre.
Bloggs: “I’d like to find out about your 13% fixed deposit over five years. Sounds too good to be true. What would I earn annually on a deposit of R1million?”
Call centre operator: “R85000.”
Bloggs: “But that’s not 13%. If it was 13%, I’d get R130000 a year.”
CCO: “If your interest is paid out annually, the interest rate is 8.5%. If the interest is paid on expiry, the rate is 10.5%. You’d get out R1650000 after the five years.”
Bloggs: “So where does the 13% come in?”
CCO: “That’s the simple rate per year on your initial capital over five years.”
Bloggs: “What the #\$%@!”
The conversation has been taken from an article on iol.co.za. The described scenario is fictitious, but the figures are real.
So which rate should I use to compare fixed deposit rates
The best rate to compare is either nominal or effective annual rates. The latter is probably the best rate to compare as it takes into account compounding. This is the rate you will see on ratecompare.co.za.
You will notice that simple interest is far above effective rates. Thus are much more appealing for banks to use in their online ads. Do not fall into this trap. Always look for the effective annual rate or the nominal rate if you want to compare fixed deposit rates.
RateCompare was born
Turns out - not only are the ads often merely showing simple interest, the banks' websites are showing all kinds of weird interest rate methods. Some do not disclose any method (e.g. Absa does not disclose whether their rates are nominal or effective), whilst others come up with their own terminology.
This &*^@% me off. So I did the following.
- I browsed to each bank's website
- Read the fine print & converted their rates to effective annual rates
- Published all rates to this website
I now keep this website up to date on a monthly basis. (I wrote a script which vistis and scrapes the information from the banks automatically to save time).
I hope this helps others understand what rates banks are really offering.
Kind regards Walter from ratecompare.co.za Email me email@example.com