Safe liquid investments to maximise your emergency fund

Wondering how to make the most of your emergency fund? Here’s what you need to know about earning interest on your money while still making sure it’s safe and easily accessible.

What are safe and liquid investments?

Personal finance experts recommend that you save enough money to live comfortably for at least three to six months during difficult times, such as when you unexpectedly lose your job.

That’s a lot of money which needs to be stored safely, where there’s little risk, so it’s still available when you really need it. Additionally, you want to make sure your emergency fund is as liquid as possible, meaning it should be ready to convert to cash without leading to a loss. Finally, you also want it to earn interest while you wait to use it. Add this up and you have all the elements of a safe liquid investment.

What are the top safe liquid investment options in South Africa?

As mentioned above, and in a nutshell, safe liquid investments are all about using your emergency fund to make more money while making sure you can access it quickly and easily without much hassle or loss.

However, this can be a tricky balancing act. Take, for instance, cash. It’s the most liquid asset of all. But, although it’s easily accessible, it’s probably not safe to keep it under your mattress. Plus, it won’t earn any interest just sitting there.

On the other hand, investment options like stocks and bonds can offer substantial earnings, but they are too volatile. You never know what the state of the market will be when an emergency comes up and you have to sell your investment in a hurry. Not only may you have to sell at a loss, but you may not be able to access the money as fast as you need it.

Keeping your funds in a checking account doesn’t help much either because it’s likely low or zero interest, and you end up losing money to inflation. With a checking account it’s also easy to spend the money since it’s not separate from the money you use for everyday expenses.

That being said, the good news is South Africans still have other ways to earn interest on their rainy day fund safely and conveniently.

High-Interest Savings Accounts

Many banks in South Africa offer savings accounts with great interest rates. For instance, banks like Nedbank, Standard Bank, Capitec, and Absa provide a wide range of savings accounts to suit all situations.

While some of the interest rates are not as high as you would like (rates generally vary between 2 and 5%), it’s still better than earning 0%.  When choosing a high yield savings account, be sure to check the minimum balance required for the interest rate you want.

Also, find out if the rate stays the same throughout or drops after a while. More importantly, confirm that you’ll be able to quickly access your money in an emergency and without penalty. In most instances, some banks allow instant transfer of the funds to your everyday account. You may also be able to access it via debit card or by withdrawing at an ATM.

Money market accounts

A money market account works similarly to a checking or savings account, though it’s separate from these two. You can make deposits and withdrawals while earning interest on any balance you have.

Money market accounts are especially great for emergency funds because your funds are more easily accessible and protected by insurance. However, you may need to deposit a big lump sum before you can open one, and because the money is easily accessible, you may be tempted to spend it on non-emergency expenses.

Fixed deposit accounts

If you want to ensure you won’t spend the money unnecessarily, you can opt for a Fixed Deposit account. It only allows you to access your funds after a minimum period and only after you give notice. However, keep in mind that this may put you at a disadvantage if your emergency is financially urgent.

Tax-free savings accounts (TFSAs)

As the name suggests, this type of special savings account allows you to invest your emergency fund, such that any interest, distributions, capital gains, or withdrawals are tax-free. Currently, you can invest up to R36 000 per year and up to R500 000 in your lifetime in fixed deposits, equities, or both.

Depending on the type of account, you can access the funds within seven working days, though it may take longer if the investment has a maturity date. However, it’s important to limit withdrawal with this type of account because, with each withdrawal, your lifetime limit of R500 000 also reduces by the same amount.

Stocks and bonds

Investing in stocks means you’re part owner of a company, while bonds are a type of fixed income asset where you loan money to the South African government for a specific period in exchange for regular interest payments.

As mentioned earlier, stocks and bonds are not the safest investment options for your emergency fund. The only reason you would consider them is that they can offer a potentially high return, but you’ll have to sell first to liquidate your emergency fund (or part of it), and this may take a while. However, it can be well worth it if you liquidate while the market is up.

To summarize, your emergency fund can be a lifesaver on rainy days, so it’s best to invest it in a safe and low-risk place that’s as close to liquid as possible. That way, you can continue to grow your emergency fund smartly and effortlessly for better cushioning against unexpected expenses.