When we think about investing we typically think about our long-term goals such as retirement. But what are the options for short-term savings, where you will need the money in less than five years? This could be for a deposit on a home, saving for a holiday, or just to diversify your risk by keeping some of your investments in cash.

The good news is that there are some good options available that can protect your capital while offering interest. Here we unpack the pros and cons of a few options for short-term savings.

Money-market funds

Money-market funds consist of short-term government, bank, or corporate debt. These funds are ideal for investors seeking a low-risk option they can access easily. They typically offer higher returns than a traditional bank savings account.

“These strategies are conservative and predictable as the return profile tends to follow the repo rate. If the repo rate increases, the return profile will normally increase, and if the repo rate decreases, the return will normally decrease,” says Ivan Pretorius, financial planner, GIB Financial Services.

Income funds

There are different styles of income funds that could suit short-term investing. An investor would typically access these through a unit trust. It is important to understand the underlying asset classes an income fund is exposed to.

“You would preferably want to make use of an income fund that has exposure to mostly cash and bonds. These funds normally target a cash plus return and generate both interest and capital growth. Capital growth is taxed in line with capital gains tax (CGT) where only 40% of the growth is taxed for individuals and 80% for trusts at the respective marginal tax rate. Individuals enjoy a R40 000 CGT exemption each tax year. Access to money in income funds normally takes up to five working days,” explains Pretorius.

Fixed deposit

Fixed deposits are a good option to consider when at or near the top of an interest rate cycle, as is the case at the moment. This is because you benefit from a fixed rate for the duration of the investment period. Once rates start to come down, your fixed deposit rate remains at the higher rate.

There are several different options for the duration of a fixed deposit, such as six months, one year, two years, and five years, Your money needs to be kept in the account for the full chosen duration. Typically the longer the duration of the fixed deposit, the higher the interest rate you’ll get. For example, on an amount under R100 000, Absa would pay a monthly rate of 7.8% for a 6-month fixed deposit, but 8.4% for a 12-month fixed deposit.

You can also decide how to get paid your interest ‒ monthly or at maturity, for example. If you choose to get paid out at maturity, then each month’s earned interest will remain in your account and you’ll earn interest on that interest.

Make sure you are aware of any early withdrawal penalties in the event that you need the money earlier than the agreed investment period.

The drawback of this type of investment is that you cannot make additions to it, so you need to already have your full amount saved up. It’s not suitable if you want to keep adding to your savings.

Notice deposit

If you are happy to access your money after giving some notice, you can get slightly higher interest rates in a notice deposit product than a straight instant-access savings account. A notice deposit account won’t typically pay as much interest as a fixed deposit, but it offers greater flexibility.

Different banks offer products with different notice terms. At African Bank, for example, you can access funds within seven, 32, or 90 days’ notice. Standard Bank meanwhile offers the same but also a 21, 45 and 60-day notice account.

Typically, the more notice you are prepared to give, the more interest you are likely to earn. But with African Bank, for example, the best rate is offered on its 32-day notice account at 8.33% while it’s seven-day option offers 7.96% and its 90-day account offers only 6.88% interest. Always check each bank’s website to get the most up-to-date information on their rates.

Savings account

All of the major banks offer normal savings accounts with instant access. Generally, these rates are lower than money-market accounts, fixed deposit accounts, or notice deposit accounts. Some banks offer some incentives to enable savers to boost their interest rates on a demand savings account.

If you’re part of the Discovery ecosystem, for example, you can get a boost of up to 1.5% on your savings account interest rate (depending on your banking products and Vitality Money status), taking your demand savings rate up to 6.6%.

TymeBank’s GoalSave offers a tiered interest-rate structure starting at 4%, increasing to 5% after 30 days, and then 6% after 90 days. If you give 10 days’ notice before withdrawing, your rate goes up to 7%, and if you have your salary paid into your TymeBank transaction account, that rate goes up to a whopping 10%.

Non-bank short-term savings options

If you want to diversify some money away from traditional bank deposits there are a few non-banking options to consider for your short-term savings, including the RSA Retail Bond, the Fedgroup Secured Investment and Outvest’s Fixed Outcome Endowment.

RSA Retail Savings Bond

This is a series of bonds with two-year, three-year and five-year terms. Fixed Rate Retail Savings Bonds earn a market-related fixed interest rate, which is priced off the current government bond yield curve and not the repo rate. Currently the rates are 8.75% for the two-year bond, 9.25% for the three-year bond and 10.5% for the five-year bond.

Fedgroup Secured Investment

This is a fixed-rate investment backed by a portfolio of participation bonds. If you invest in this product your money is used to finance loans to Fedgroup’s partners that then go on to purchase commercial, retail or industrial properties. It’s a collective investment scheme and therefore regulated by the Financial Sector Conduct Authority. It pays an annual effective rate of 11.94% with a five-year investment term.

OUTvest Fixed OUTcome Endowment

For investors who may already be receiving interest in excess of the annual tax exemption, the OUTcome Endowment from OUTvest could be a good option.

It currently offers an after-tax rate of 7.4% per annum. This could be tax effective if you are fall into a higher tax bracket, as the income is taxed in the hands of the insurer at 30%. This means the returns are paid to the investor after tax.

The downside to endowments is that they restrict you in terms of withdrawals. “These products offer one withdrawal in the first five years. You cannot withdraw twice,” adds Locke.

Keep reviewing your short-term savings

Make use of the resources available online to keep up-to-date on which banks are offering the best rates. Ratecompare.co.za is a good option, but always double-check with the bank’s own website to check that the information on any comparison site is accurate.

Pretorius adds: “Remember to always understand the tax implication of your investment as they might have a significant impact on the return. The full growth portion in these strategies will be added to your taxable income after the annual exemptions have been reached.

“The interest exemption for the 2024 tax year is set at R23 800 for individuals under 65 years old, and R34 500 for individuals 65 years and older. This is important to note as once you have reached this exemption, your return over and above can be taxed at up to 45%.”

Ivan Pretorius | GIB Financial Planner