The reduction of official interest rates to 2.50 per cent is an historic event which raises a number of questions: how slow is the economy? Have we reached the bottom of the interest rate cycle? How are savers coping with the low returns?
I’ve had a lot of correspondence about saving this year, and I thought I’d make some observations about how to get the best out of your cash in such a low interest rate environment.
1. Know your goal: this should be your starting point. If you’re saving for a house or to go overseas, you might want different product features than if you’re planning to live on the yield from your existing lump sum. So set your saving goals and ensure you’re looking at the right options for your money.
2. Shop around: When looking for the best deal on your cash, you must be prepared to deposit somewhere other than your usual bank. When the cash rate is so low, a difference of .05 per cent can be important and you’ll only be aware of the difference if you stay informed. Use the financial comparison sites on the internet.
3. Spread the money: people trying to save a lump sum should consolidate into one high interest account, so they pay only one set of fees. But if your lump sum has to pay you an income, I suggest having the cash in at least two places so you can offset poor performance in one with the solid performance of another. Have the bulk of your savings in a high interest cash account, but think about diversifying into term deposits and funds where your cash is invested in a mix of cash and bonds.
4. Understand your actions: the pursuit of yields can lead people into depositing money in a product that only pays interest quarterly, or that locks away their capital for an inconvenient duration. Or, you find a great return on your money only to discover that the high interest rate finishes after six months and then reverts to a much lower rate. If your primary concern is security, remember that cash deposits in banks, building societies and credit unions (and other ADIs) are guaranteed by the government, up to $250,000.
5. Don’t cheat yourself: the yields for term deposits are typically between 3.75 and 4 per cent right now. That spread can cost you several thousand dollars a year on large balances, so make sure you’re closer to the high end of the interest rate spread. Also, if your cash earns 4 per cent in an online saver, and you have a well-used credit card that charges you 15 per cent and fees, you are cheating yourself by not making that credit card payment a priority. And never forget inflation – your cash deposits must be at least ahead of inflation, or your gains are largely illusory.
Finally, try to be level headed. Avoid panic and exuberance – they both lead to poor decisions. Better to let the facts guide you towards good judgement.
* Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email with any queries you may have or check for your nearest branch.