In an era of cheap credit, stingy savings-account interest rates are costing Australians – from retirees to would-be first-home buyers – and forcing them to look elsewhere for better returns.
With interest rates at historic lows and pressure mounting on the Reserve Bank of Australia to cut the official cash rate (which has been unchanged at 1.5 per cent since August 2016), lenders have sought to claw back profits by slashing returns on savings accounts and term deposits to sub-inflation levels.
Inflation sits at 1.8 per cent, while the base rate for a flexible savings account is hovering at an average of 1.31 per cent – sometimes as low as 0.1 per cent.
Those looking to make their money work harder for them are ploughing savings into their superannuation account, using an offset facility, or turning to investing – which can result in higher returns, but also involves greater risk.
Australians using savings accounts and term deposits are “the huge losers in this 31 months of no change to the cash rate”, Canstar financial services group executive Steve Mickenbecker said.
“If you’re saving for a first home or living off savings, you’ve gone backwards big time,” he said.
While investment alternatives to savings accounts and term deposits “do require you to take on a level of risk” that’s a “trade off”, many are finding themselves forced to consider, Mr Mickenbecker said.
The super alternative to shrinking savings returns
Current returns on savings accounts and term deposits mean “the real value of your money is diminishing”, certified financial planner Wayne Leggett said.
When considering the alternatives, savers should take into account their circumstances including their savings objective, time horizon and tax rate.
Home owners paying off a mortgage can consider ditching their savings account for an offset account – a bank account linked to a loan, which can reduce the amount of interest that needs to be paid and help the borrower pay back their loan faster.
“If you’re saving for the sake of saving, by far the best option is to put your money in an offset account,” Mr Leggett said.
Voluntary super contributions can also be a “no brainer” for some Australians, thanks to their concessional tax treatment.
“It depends on where you are in life and on your circumstances. For those aged 40-plus, it’s almost a no-brainer,” Mr Leggett said.
“If you are north of 50 and retirement is less than 10 years away, it’s easily the best thing to do with your money.”
Saving v investing
Diminishing returns are leading some savers to shun the safety of savings accounts and turn to investing instead.
“Bank savings accounts are really safe up to $250,000, so they serve a purpose if you just want to keep that money safe. But they shouldn’t be seen as an option to build wealth,” Daniel Foggo, chief executive of peer-to-peer lending platform RateSetter.
“Markets are now pricing in the probability of [the RBA making] a 25 basis point cut by the end of the year,” he said.
“Having your money in a term deposit or online savings is sub-inflationary.”
A growing number of fintech platforms and apps have made it easier and cheaper than ever for new investors to get started using small sums of money.
“The cost of buying and selling different investments has come down over the years so you don’t need a huge amount of money. People should be thinking in the hundreds of dollars, not thousands,” Mr Foggo said.
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