Australians are being encouraged to repay debt instead of putting money in the bank, as new data confirms that savings accounts are paying record low rates of interest.
The Reserve Bank reported in recent days that online savings accounts and bonus savers were paying less than a third of what they were a decade ago, with term deposits not much better.
Average interest rates on online savers peaked at 7.3 per cent in 2008 before plummeting. They were sitting at 1.65 per cent in April, according to the latest RBA figures.
Back in the golden years, a saver with $10,000 could have earned more than $600 a year in an online account. Now, they’d be very lucky to get $200.
(Data on online savers only goes back to 2004 because that’s when they started being offered in Australia. NAB was the last of the big four to offer them in September 2005.)
Bonus savings accounts, which offer conditional bonus interest on top of base rates, went as high as 5.5 per cent in 2008. They’ve dropped since to 1.95 per cent.
Gregory Mowle, a financial literacy expert, said with rates so low, Australians should consider paying off debt instead.
“As an alternative to a savings account, if someone has debt, any form of debt, get out of it. It’s the best form of savings you can have,” he told The New Daily.
“For people with debt, my message is, rather than parking your $500 somewhere and barely earning 1 per cent, well, if you’re being charged 15 per cent on a $5000 credit card debt, repay the debt instead.”
He also encouraged Australians with bonus saver rates to keep a close eye on the fine print.
“If a certain minimum balance isn’t kept in the account or if you withdraw money out or don’t put a certain amount back in, you won’t get that token interest rate payment.”
Even at low rates, saving is still a good idea
Mr Mowle acknowledged there is a good economic argument for rock-bottom rates.
“Rates are at record lows because the government and the lenders want you to borrow money. If everybody saved, the economy would collapse.”
But he said saving is still a good idea, especially to protect against emergencies such as job loss.
Don’t even think about experimenting with the share market or other sophisticated investments until you have, at a “bare minimum”, enough savings to cover three months of living expenses, Mr Mowle said.
“Some people jump straight into shares because their personality says savings accounts are too boring. But I think someone should have at least three months’ worth of cash there before they start to diversify and look at things like equities.”
Savings accounts may be boring, but they’re also safe, he said.
“I’d caution to people not to be chasing alternatives to your basic savings products because promised higher rates always come with guaranteed higher risk.”