Saving for the short term

In this advice column Kyle Wakelin from PSG Wealth answers a question from a reader who wants to know how to invest a lump sum that may be needed on short notice.

Q: My husband has been working in the UAE for the past six years. However recently a number of expats were sent home without notice and he is worried that he may be next in line. He sent R320 000 across to South Africa so that we would have money here in the case that he did have to relocate and there was a delay in having his final salary paid out.

We want to know how we should invest this money so that it is available within 30 days if we should need it.

He also has a small pension with Old Mutual, worth around R110 000, and earlier this year he also invested R120 000 with FNB in case of emergencies.

I am unfortunately not able to assess your specific needs based on the limited information we have available. However, I will make a few assumptions to provide some focused advice which should, at least, steer you in the right direction.

Investors clearly need to differentiate between their short-, medium- and long-term requirements and invest in suitable investment vehicles. This means that short-term capital should be allocated to secure and accessible investments, while medium- and especially long-term capital can be invested in the type of investments that should generate inflation beating returns.

It is clear that the amount you wish to invest now may be called upon in the short term and for that reason it needs to be held in a conservative and accessible investment. I would recommend doing a budget exercise to determine what your actual expenses would be in the event of your husband being sent home on short notice. This figure should be a multiple of a chosen number of months – in other words work out six to nine months of expenses.

For this money I would recommend cash funds, such as money market funds. The rates are currently quite attractive and capital can usually be withdrawn within 24 hours. The money you have with FNB money may even serve this function.

You may want to be less conservative with any additional amounts, especially because there is no clear indication that you may need it. In this case you may want to consider investing in an income fund, which is still deemed low risk. There is slight risk of volatility, but with the opportunity of outperforming cash investments by 1% to 2% a year over longer periods.

Your remaining capital, which could be considered a longer-term investment, should incorporate higher-yielding assets including bonds, preference shares, property and even a small portion in equity (shares). The nature and extent of how much you allocate to these different asset classes can only be determined by sitting down with a suitably qualified, independent financial planner.