08 Dec 4 ideas for places to stash your cash!
Australia’s historically low interest rates are great news for borrowers, but a headache for savers. But there are still lots of options available depending on your outlook! Whether you are a young single saving for a home deposit, a family saving for future education costs or a retiree seeking income, here are 4 ideas for finding the best place to stash your cash.
In a recent survey by Westpac, 29.4% of people said bank deposit accounts were the “wisest place for savings”. Real estate (24.6 %) and pay debt (16.5%) were also popular choices, ahead of shares (9.5%). And despite generous tax breaks, superannuation (5.2 %) limped in behind “spend it” (5.4 %).
Finding the best option for money is not just about the highest return. We need to consider what your plans are for that money; is your need short term, medium term or long term? If you are saving for a holiday or a home deposit, long-term investments such as shares or super are probably not good options.
What about the goal of the cash, is it to make money or conserve money? Because saving and investing are two different things. Saving means having money available for vacations, Christmas or even an emergency fund. Investing is generally when you’re going to leave the money alone and let it do its thing for five years or longer.
1. Play safe with bank deposits – SAVING
This is your traditional concept of saving. Bank deposits come with a government guarantee up to $250,000, but safety comes at a cost. Five years ago term deposits were paying more than 6%. Today, they are paying less than 3% on average, only about 1.5 percentage points above inflation.
Alternatively, high interest savings accounts pay a fraction above 3% if you are prepared to shop around. Unlike term deposits, these accounts have the added bonus of being at call.
If you put $5,000 in an online account at 3 per cent you would earn $150 in interest after one year and $808 over five years. Plus then tax is payable on any interest earned. It doesn’t seem very fair, does it!
Let’s be realistic that with the current interest rates on offer you’re not going to get rich off anything like this. But this strategy isn’t about making money – it’s about saving for the unexpected or adventurous!
2. Pay off debt – SAVING & INVESTING
This strategy is a combination of saving and a bit of investing. If you have a mortgage or credit card debts, then using savings to reduce debt can be a winning strategy. It’s not sexy, but it is smart. You’re using savings to invest in yourself and/or your assets and therefore your future. That sounds a bit more exciting and is a good way to think about repaying debt – it frees you up to do more with yourself!
The average standard variable home loan interest rate is currently around 4.6%, so any additional payments you make are earning an effective interest rate of 4.6%
Even bigger savings can be made by paying down credit card debt. Most credit card interest rates range between 8.99% and 23.5%. The rewards credit cards tend to be at the higher end of the spectrum and your ‘no-frills’ basic cards at the lower end of the interest rate.
A $5,000 debt on a credit card charging 18% interest will cost you around $900 in interest a year. If you make the minimum payment each month you end up paying $17,181 over 33 years! That’s insane, though some people choose to live that way. But by increasing your monthly payment to $246 you cut the cost to $5,902 over two years, a saving of $11,279.
Credit card debt is some of the nastiest, crippling, soul-destroying debt out there – if you need to learn how to manage credit card debt let us know.
3. Build wealth with shares – INVESTING
If you are saving for a longer-term goal you can probably afford to take a little more risk for a potentially higher return.
Australian shares returned 9.7% a year on average in the five years to July 2015 from a combination of capital growth and dividend income.
If you had $5,000 cash in hand the easiest way to gain exposure to a portfolio of quality Australian companies is via a managed Australian share fund. Alternatively, if you already hold direct share investments you could purchase additional shares.
Shares can be tricky if you are looking to do it yourself. If you want to increase your understanding of share trading and want to get involved, the Australian Stock Exchange (ASX) has a great amount of resources to help you increase your understanding of share trading concepts, especially around speculative trading. I especially enjoy the ASX sharemarket game, it’s a really good way to understand DIY trading – especially the emotional side of it! You can learn more about it here.
4. Secure your future with super – INVESTING
If you are saving for retirement, then it’s hard to go past super. Not only does super come with generous tax concessions but the long-term nature of your investment allows compound interest to work its magic.
According to research firm SuperRatings, the median balanced super fund returned 9.6% in the 2015 financial year and 9.11% a year over the past five years. ‘Balanced’ here means 60% is invested in shares and other growth assets with the remainder in cash and fixed interest.
I’m a fan of putting a little bit extra into super for the compounding interest/longevity exposure. One reason is because all of the current stats from the government around the average cost of living after retirement assume you own your own home. All of these stats pre-suppose that you’ve paid your house off and want to sit at home staring at the wall all day, not having much to actually have a fun retirement! In future it’s likely Australia will have a heavier renting market, especially with the housing shortage and younger generations moving towards a renting culture.
Of course, if you need ready access to cash you wouldn’t go putting everything in super, and there are also limits on how much you can contribute to super in a financial year so seek advice so you don’t exceed contribution caps. But a little bit extra goes a long way.
There are options available if you want to make your cash work for you. As always in this space you need to do some research and seek advice from a professional whom you can have frank discussions with and who you can understand. Jargon in these circumstances might sound smart but won’t cut it when your money is involved.
I encourage discussion, so what about you? Have you got any strategies that you’ve used before that you’ve found helpful? Feel free to comment or contact me directly with any questions! Don’t forget to join our community and discussions on Twitter and Facebook.
Please note this information is general advice only. Please seek advice before acting on any information in this article.