Interest Rate

Interest Rates Matter!

In Warren Buffett’s most recent letter to shareholders, he again spoke about the impact of fees on long-term investment returns. He highlights the fact that minimising your fees maximises your long-term value and the earlier you do it, the better.

When it comes to investments in cash, there’s another factor to consider. Given that the potential return is fixed in the form of an interest rate, maximising the rate will also maximise your long-term value.

Leaving your money in your cheque account is a lazy and ineffective option for storing your cash. As an example, Absa offers zero interest on their personal cheque accounts. They’re no exception, all major banking options offer little in the way of interest return on money kept in such accounts.

In order to maximise your long-term value, moving over to an account meant for saving will help you find the best possible return. As your savings duration increases, the impact of the interest rate widens.

Let’s assume that we have asked around and received the following interest rates on savings accounts with three banks: Bank A will give us 6%, Bank B gives us 7,5% and Bank C gives us 4%. We can visualize the future value of a hypothetical R1,000 lump-sum saved with each bank. Looking at the chart below, the impact of the interest rate can result in vastly different outcomes for long-term saving.

Capture

One other important factor to consider is inflation, which is defined as the rate at which the average price of goods and services in an economy increases over time. If the savings rate that your bank has given you is not greater than the inflation rate, then your money has actually lost value – it’s a reduction in the purchasing power of your money.

Savings in this form are well-suited for specific future goals. You may be saving for a wedding, your child’s education, or just keeping funds safe as part of your greater portfolio. Purpose-driven saving can be a great way to plan for your future with returns you can depend on with relatively little risk or research necessary.