A money market account trades in bank instruments called “paper”, such as Treasury bills, Banker’s acceptances, certificates of deposit, bills of exchange which all trade in a period of less than a year.
The money market is trades at the interbank level where banks lend and borrow to each other. These wholesale rates are higher than the retail rates offer by banks on their savings accounts.
The current rate varies between as the underlying instruments reach their varying maturing rates. These instruments are also dependent on the interest rate cycle. As interest rates rise so too will money market rates.
The nominal rate is the actual rate of return – normally annual. The effective rate is the rate achieved by reinvesting the interest received and compounding it back into the investment.
Nominal rate of 7% per annum yields and effective 8.25% over a 5 year period.
If you draw out the interest then you do not get the effective rate. You actually get the nominal rate.
Real rate is the adjusted rate received after subtracting the inflation rate.
Nominal rate 8% less inflation rate of 6% leaves a real rate of return of 2%.
Money market accounts are ideal for short term (up to three years) savings as they are accessible at short notice..
Available at you local bank and offer around 4.5%.
Money market funds are collective investments which offer a fund of money market accounts from different institutions. They cost more as there are annual fees applied to them from the advisor, fund manager and administrator.
Times are getting tougher in the face of rising fuel costs and the weakening rand.
Cutting back on expenses is a matter of attitude in the household where little savings on different expenses can make a big difference collectively.
Here are some ideas on ways to trim the household budget.
Check with your insurer that they have adjusted the value of your motor vehicles.
Insurance companies will only pay on the current value of your vehicle which depreciates year on year. They don’t adjust this automatically so you need to ask for an adjustment.
Women after statistically better drivers than men. So they should drive the more expensive car in the family.
Lift clubs to drop the kids and get to work. Sharing your car will save a lot during the month.
Converting your house to a ” Pay as you Go” meter has great savings potential. Not only for the cost differential but because you can manage your usage much more closely realising where the saving potential is.
Medical aid plan.
Is it the most appropriate plan for you? You can easily over insure by choosing comprehensive plan if you lead a healthy lifestyle. The big costs are mainly in hospital, so make sure that your plan has unlimited cover for this. Out of hospital expenses are generally smaller and are paid from your savings account. If you are a low user you do not need excessive benefits for out of hospital expenses.
Joining a wellness program which most plans offer has some value. If you focus on getting fit and healthy, you should rely less on your medical aid.
Use your credit card like a charge card. There are no transaction charges at the till when using a credit card. Pay your credit card up every month in full by the due date and you avoid interest charges as well.
Make sure you have the right contract. Analyse your usage and choose a more appropriate contract. Data bundle if you use data more often. Keep a closer eye on usage during the month.
Saving on expenses will need a collective effort from all members in the family. Keep a close eye on where the money is being spent. Remember – If you can measure it you can a mange it.
Independent Financial Advice
Do you have a plan?
Paul presents “Financial Fitness” on Radio 702 and Cape Talk 567
on Morning Breakfast on Sundays just after 08h00.
Paul is The Consumer Advocate for the Financial Planning Institute of South Africa