Don’t Settle for Savings – INVEST!

Oct 27, 2014 Blog  INVESTMENTS
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The word savings usually makes me think of a treadmill. Why? Well, it comes down to a couple of experiences I’ve had in my life. Specifically when I save for something in the short to medium term, you know 2 to 5 years. By the time I actually have reached the Goal amount, the actual price of the goal has jumped higher. I feel this is specifically relevant for big holidays or adventures you have to plan for, way in advance. So it is important to make sure your money is growing while you wait.

So what do you do? Well, the answer is short-term investments.

Before making any commitment it’s important to do your research and do it well. The first impression I got when investigating short-term investments was that you got such a small return, for so much admin and inconvenience. However you can’t just keep your savings in your cheque or savings account. You need to at least get some sort of return, because the average savings account’s returns are less than 1% per annum.

With that in mind, when I saw RainFin launch recently I thought to myself that here is a real alternative to what banks are offering. But first I needed to do a little investigating, just to make sure!

For this case study:

You have R10000 savings (This can be your existing savings, plus a tax rebate and some gifts) to start with and want to add R4000 to it every year and cash out after 3 years. Which Investment option would give you the biggest return after 3 years: a money market account or investing on the RainFin peer-to-peer lending marketplace?

I thought it would be best to run the comparison against a money market account from one of the biggest banks in South Africa – I chose FNB as I found it very transparent. You are welcome to add your own calculation using another account in the comment section below.

So let’s get down to the Facts:

I will compare the FNB Money Market Investor account for this comparison, it is important to note that this is a money market account, not a money market fund.

FNB allows you to have a free Money market account, if you have a resident account with them, otherwise they will charge you R13 a month.

You need a minimum of R10 000 in an FNB Money Market account.

The Interest rates are as follows

Interest (per annum)

R10 000 – R19 999 – 1.15%
R20 000 – R49 999 – 3.55%
R50 000 – R99 999 – 3.65%
R100 000+ – 4.15%

*Note: One advantage of having a money market account is that you can transfer the balance above R10000 out of the account when ever you want to, but you will pay a fee.

RainFin Charges a 1% Service fee of your investment amount as well as R35 per month account fee

RainFin also recommends on their website that you diversify your risk over multiple Loan Applications, so that is what we will do.

As a money market investment is a low risk investment we will also only invest in loans where the risks are very low. So we will look for 3 Loans to invest in, with the initial investment of R10000 spread between:

  • 1/3rd in a 10% interest rate loan
  • 1/3rd in an 11% interest rate
  • 1/3rd in a 12% interest rate

We will re-invest that into new loans after the first 24 months, into the same type of loans only with a shorter term of 1 year. The R4000 each year thereafter will be invested into a loan where the interest rate is 11%.

On RainFin a borrower will only be able to qualify for a 12% and lower Interest Rate with a high Credit Score, good payment history and a good enough cash flow. Therefore the risks are as low as you can possibly get.

For the Money Market, we will start with an initial investment of R10000 and deposit R4000 into the account every year thereafter, so that is two additional deposits of R4000. And we want to cash out at the end of year 3.

Let’s look at the calculation:

RainFin:

Costs:

R35 per month for 36 Months = R1260 (This is not deducted from the Investment)

1% of the Investment amount:

1% of R10000 = R100
1% of R4000 = R40
1% of R4000 = R40

On RainFin you have to Invest into multiple Loans as explained above, here is the breakdown of the individual Investments:

  • R3333.33 Invested in a 10% Loan for 24 months will return (minus the 1% of the initial Investment): R3993
  • R3333.33 Invested in a 11% Loan for 24 months will return (minus the 1% of the initial Investment): R4065
  • R3333.33 Invested in a 12% Loan for 24 months will return (minus the 1% of the initial Investment): R4139
  • Re-Invest R3993 in a 10% Loan for 12 months will return (minus the 1% of the initial Investment): R4348
  • Re-Invest R4065 in a 11% Loan for 12 months will return (minus the 1% of the initial Investment): R4467
  • Re-Invest R4139 in a 12% Loan for 12 months will return (minus the 1% of the initial Investment): R4589
  • R4000 Invested in a 11% Loan for 24 months will return (minus the 1% of the initial Investment): R4879
  • R4000 Invested in a 11% Loan for 12 months will return (minus the 1% of the initial Investment): R4395

Total Contribution: R18000
Total Return: R22678
Total Monthly fees: R1260

Return on Investment (ROI): R3418

FNB Money Market Investor:

On FNB’s pricing guide there is no indication of EFT deposit costs, only for cash and cheque, therefore I assume it is free.

I will also do this case study as if the client is an existing FNB client, so no additional monthly cost either.

  • Initial Investment of R10000 after year 1: R10115
  • Then depositing additional R4000, the value after year 2 will be: R14277.32
  • And after the last deposit of R4000 the value after year 3 will be: R18487.51

Total Contribution: R18000
Total Return: R18487.51
Total Monthly fees: R0

Return on Investment (ROI): R487.51

The Bottom Line:

FNB ROI: R487.51 vs. RainFin ROI: R3418

In conclusion we can see that even if the inflation on your goal was 8% per annum, you would still be able to afford your goal if you invested your savings with RainFin.

References:
https://www.fnb.co.za/downloads/pricing-guide/Saving_and_Investments_Pricing-Guide.pdf
https://www.rainfin.com/about/investors
https://www.fnb.co.za/rates/InvestmentAccounts.html?productName=Money%20Market%20Accounts

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