What should I do with all my cash? (#219‪)‬ The Fat Wallet Show from Just One Lap

When you’ve gotten your debt and spending under control, it can be comforting to hold on to your free cash for a while. Taking the leap from that safe pile of money to the Big Bad Market is not easy.
However, as we’ve discussed before, cash is not a risk-free investment. The longer you sit on a lump sum of cash, the more risky it becomes. This is because of inflation. The effects of inflation are difficult to internalise because the rand value of your money stays the same.
Let’s say you put R100,000 in a low interest cash account today. The interest you earn is enough to cover the annual cost of the account, but nothing more. At an inflation rate of 5.5%, in 10 years you’d only be able to buy what R58,543 can buy you today. The rand amount is still R100,000 so it seems like you haven’t lost anything, but you can afford half of what R100,000 can buy you today. In 20 years your bank statement would still reflect R100,000, but you’d be able to buy what R34,272 can buy today. As you can see, the inflation risk increases every year.
This week we help three listeners figure out how to put their cash lump sums to use. The checklist we managed to come up with for a cash lump sum is as follows:
Fund your tax-free investment vehicle: Commonly referred to as tax-free savings accounts or TFSAs, these products should be every South African’s first investment. As an investor you are liable for dividend withholding tax, tax on interest and capital gains tax outside of a tax-free account. As we discuss in this week’s episode, these accounts are not meant for cash savings. Don’t speculate unless you can afford to lose the money: While cash makes it easier to capitalise on investment opportunities as they present themselves, cash can also make it easier to hop on a bandwagon that’s not suitable. Don’t invest your cash into a speculative investment (think alternative asset classes, sub-indices or individual companies) unless you can afford to lose that money. Lump sum vs average: While the math shows us investing an entire lump sum in one go makes more financial sense in terms of potential future earnings, going into the market one small investment at a time is a legitimate option if you’re scared. If this is your first investment, think of it as a teaching tool initially. Once you feel more confident, you can add the rest. Work out the future value: If cash is giving you a feeling of safety, find an online calculator to work out the future value of your lump sum using a 5.5% inflation rate. Now play around with higher or lower inflation rates. Hopefully seeing the value of your investment deplete will be the motivation you need to get going. Diversify: If you’re holding on to a large amount of cash, you are not diversified. Make sure to put your money to work. Subscribe to our RSS feed here. Subscribe or rate us in iTunes Win of the week: Matt:
If I earn a salary from a foreign company and then decide to do the nomad thing and travel around low cost of living countries for, say, a year but remain a tax resident in SA. My understanding is the first R1m earned will be tax exempt- is that the case?
“Tax residents in South Africa will be taxed on their worldwide income. But that is dependent that they’re still SA tax residents. Offshore salary earned is taken into account. R1.25m ito the latest tax amendments will be exempt from tax in SA.”
Harry
This was mainly due to the fact that I did not know what the best option was, and my new employer only offered a provident fund.. I've been maximizing my tax benefit with my new employer provident fund. I'm also sitting on cash in a savings vehicle with my bank, currently returning around 3-3.5% interest.
I'm living rather small (renting only, no debt of any sort) and have quite a bit of money to invest/save every month.
What would you advise I do with my portfolio? The preservation fund? Should I keep maximising my provident fund contrib