When interest rates are high, savers smile all the way to the bank as financial institutions entice them with attractive interest rates on deposits.
But your smile may turn to a frown when you go shopping around to find the best interest rate.
This is because some banks quote effective interest rates on investments while others quote nominal rates. This makes comparisons difficult.
When rates are high, banks punt their prime-linked interest rates in the media.
But a word of warning be careful of being lured by banks which quote only the effective rate.
You may find that the nominal rates quoted by other banks, although they look considerably lower, may provide you with a better return.
Banks like to quote you the lower nominal rate when lending you money, and often quote the higher effective rate when clamouring for your investments.
The effective rate is the total interest paid to you over the term of the investment and assumes that the interest paid out, for instance monthly, is compounded (added to the capital so that you earn interest on interest the following month and every month thereafter).
The effective rate assumes that the interest at the nominal rate is compounded over the investment period.
If you choose to have the interest paid out to you instead of re-investing it and adding it to the capital, you will not receive the effective rate quoted by banks.
Banks also make comparisons even more complex by quoting the annualised effective rate.
This means if you choose to invest for six months banks will still calculate the effective rate over one year.
The bottom line is to make sure you are comparing apples with apples when you go shopping for yields.
Comparing nominal rates is the simplest way to do this.
Another tricky question to answer is whether or not it would be wise to opt for a prime-linked rather than a fixed interest rate on your savings.
Hennie Smit, the treasury manager at BoE Private Bank, says when considering a prime-linked investment, you should take a view on where interest rates are going.
Obviously, if interest rates are in an upward cycle, a prime-linked rate is a good choice. But if interest rates are on the way down, you might be better off opting for a fixed interest rate over a comparative period.
Another option is to hedge your bets by placing half your investment in a prime-linked account and the other in a fixed investment account.
But remember you will have to invest a minimum amount to qualify for the prime linked interest rates. Minimum amounts at the various banks vary from R500 to R50 000.
With prime-linked interest rates, your interest rate moves directly in tandem with the prime rate. So the moment the bank announces a change in its prime rate, your interest rate also moves up or down.
By linking your investment to the prime rate you can enjoy the high rates associated with the current high prime rates. But when the prime rate moves down, so will the interest rate that you get on your investment.