Where to invest your extra cash
Dealing with disposable income30th Mar 2022
Do you suddenly have extra disposable income through perhaps no longer paying for things like school fees, student loans or your mortgage? If so, should you spend it or invest it?
Do a financial check in
Before you start spending, consider doing a bit of introspection and assess your financial position says Ruvan Grobler, wealth manager at Bovest. ‘If you have debts, start paying off your loans and credit cards as these normally carry a higher interest rate than your investments, meaning you are actually going backwards by not paying them off,’ he says.
If debts are in order, consider what would happen financially to your beneficiaries if you were to pass on. Giles Maynard, regional manager at Carrick Wealth explains: ‘In South Africa, taxes levied by SARS are payable on death, so it is important that there is enough liquidity in the estate to pay for this, as well as other expenses such as the funeral. Having a R10 million holiday home in Knysna is a great asset, but if there isn’t sufficient liquidity in your estate, the home might need to be sold.’
To make sure a person’s will functions the way it is intended to, Maynard and his team carry out a living liquidity and distribution assessment. Using a mathematical formula, they can go through the after-death processes and identify any issues that need to be addressed.
‘Only once you truly understand what your estate looks like, can you make a more informed decision about what to do with your extra cash,’ says Maynard.
Start by investing in you
Do you have adequate emergency funds? If not, then start such a pot before event considering dabbling in the financial markets.
It could help your retirement plans too. ‘Having a clear picture of how much your retirement is likely to cost you will also give you a good indication if you should use the extra cash to boost it,’ says Maynard.
‘If you are accustomed to going on a few overseas holidays each year, fine dining, playing golf and first-class flights then you will need a considerable amount of money to look after you for 20-30 years when you are not generating any income, probably more than R40 million,’ he continues.
Be prepared for risks
Global markets have retracted thanks to inflation increasing globally and Russia’s invasion of Ukraine. This means that investors can acquire companies with the exact the same fundamentals as they were last year, but at a 15-20% discount. This makes investing in global markets and blue-chip companies like Microsoft and PayPal, for example, very appealing.
If you haven’t done so already, open a tax-free savings account so you can enjoy the benefit of your returns (capital growth, dividends, and interest) tax free. Annual contributions are limited to R36 000 and R500 000 in your lifetime and minimum contributions are dependent on the platform where you would hold the investment.
‘There are tax free savings accounts that allow you to invest in exchange traded funds, which is a cost-effective way of getting access to a basket of either shares, bonds, property, or cash of different asset classes,’ says Thabo Makume a portfolio manager at Kunye Investments.
Only if you understand and are comfortable with the idea that equities are a longer-term investment and willing to ride out the storm, then investment opportunities in equity markets will work for you. However, Grobler suggests aligning your portfolio outside of high-risk geological areas such as near Ukraine.
‘Instead, follow a proven track record rather than speculating on securities and instruments that you do not understand. There are many fee based, independent financial advisors that can assist, many of who sell their time instead of products where they earn commission,’ he says.
Finally, if you really can’t decide, Ettienne Bezuidenhout, a certified financial planner at Alexander Forbes suggests splitting your cash in three, allocating a third to a discretionary investment, another third to retirement planning and the remainder to spending.