Don't invest Trust or personal capital in the money market

Let's take a look at the money market (savings accounts, call accounts and the like) and see what terrible investments they are.

There's a very touching advertisement running on the radio right now. It's an elderly couple saying "I wish my bank wouldn't ignore me just because I'm getting older. I want a bank that really cares for me, a bank like ...bank. They are offering me a great 7 1/4% interest on our money and our capital is guaranteed against inflation. Now we can take that world cruise that we dreamed of for so long."

It's so soppy it almost reduces me to tears every time I hear it.

Now let's take a look at the numbers. Inflation is running around 6% (despite what the Government tells us), but let's be generous and say 5 1/2%. Now the old couple can't touch that 5 1/2% as it has to be ploughed back to "protect their capital against inflation". So that leaves them 1 3/4% before tax that they can spend. Assuming they need R40 000 per month on which to retire in reasonable comfort (forget the world cruise). Let's say they were clever enough to split their investment 1/2 each and that they are both 66 years old. Taking into account their tax threshold and the interest allowance, they must each earn R260 000 per year interest. That's a total of R520 000 per annum before tax.

The R520 000 must be 1 3/4% of their investment. So that means they've got to have invested R29,7m with ...bank! And if, as I believe, inflation is actually 6% then it must be R41,6m.

Now if the old boy was clever enough to amass that kind of money during his working life, do you think he'd be stupid enough to fall for this one?

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South African Institute of Chartered Accountants. Designation CA(SA)  Internationally Accredited Financial MediatorsIndependent Regulatory Board for Auditors. Designation RA<Engineering Council of South Africa. Designation Pr(Eng) Member of MENSA, the High IQ Society

 

 

 

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