Australia’s historically low interest rates are great news for borrowers but a headache for savers. Whether you are a young single saving for a home deposit, a family saving for future education costs or a retiree seeking income, the hunt is on to find the best return on your savings.
In a survey by Westpac(i), 29.4 per cent of people said bank deposit accounts were the “wisest place for savings”. Real estate (24.6 per cent) and pay debt (16.5 per cent) were also popular choices, ahead of shares (9.5 per cent). And despite generous tax breaks, superannuation (5.2 per cent) limped in behind “spend it” (5.4 per cent).
Finding the wisest home for savings is not just about the highest return. If you are saving for a holiday or a home deposit, long-term investments such as shares or super are not appropriate.
Your appetite for risk and the amount you have available are also factors. Say you receive a $5,000 windfall, or identify savings of a few hundred dollars a month. Real estate is out of the question, so what are your options?
Play safe with bank deposits
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 per cent. Today, they are paying less than 3 per cent on average, only about 1.5 percentage points above inflation.(ii)
High interest savings accounts aren't much better, paying a fraction below 3 per cent and only if you are prepared to shop around.(iii) Unlike term deposits, these accounts have the added bonus of being at call, however most of the best rates are only for introductory periods or if you regularly deposit a minimum amount each month, so check the details.
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.
Pay off debt
If you have a mortgage or credit card debts, then using savings to reduce debt can be a winning strategy.
Basic variable home loan interest rates are currently between 3.5 per cent and 4 per cent, so any additional payments you make are earning an effective interest rate of at least 3.5% and that is an after tax equivalent, worth considering when comparing to regular interest earning bank accounts.(iv)
Even bigger savings can be made by paying down credit card debt. According to Canstar, credit card interest rates range between 7.99 per cent and 23.5 per cent.(v)
A $5,000 debt on a credit card charging 18 per cent 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. But increase your monthly payment to $246 and you cut the cost to $5,902 over two years, a saving of $11,279.
Build wealth with shares
If you are saving for a longer-term goal you can afford to take a little more risk for a potentially higher return.
Australian shares returned 11.8 per cent a year on average in the five years to June 2017 from a combination of capital growth and dividend income.vi
With $5,000 the easiest way to gain exposure to a portfolio of quality Australian companies is via an Exchange Traded Fund that covers Australian shares. Alternatively, if you already hold direct share investments you could purchase additional shares.
Secure your future with super
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 10.5 per cent in the 2017 financial year and 10.0 per cent a year over the past five years.(vii) ‘Balanced’ here means 60 per cent is invested in shares and other growth assets with the remainder in cash and fixed interest.
There are a wealth of options for savers who are prepared to look beyond traditional bank accounts.
Quality advice can help you get the most out of your savings so you can achieve your personal financial and lifestyle goals sooner, so please give us a call to discuss a tailored strategy.
i Westpac-Melbourne Institute Consumer Sentiment Index, June 2015
ii Canstar, viewed 26 July 2017, http://www.canstar.com.au/interest-rate-comparison/
iii Canstar, viewed 26 July 2017, http://www.canstar.com.au/interest-rate-comparison/
iv Canstar, viewed 26 July 2017, http://www.canstar.com.au/interest-rate-comparison/
v ‘Credit Card Interest: An Overview?’, Canstar viewed 26 July 2017, https://www.canstar.com.au/credit-cards/credit-card-interest-101/
vi Lonsec, https://irate.lonsec.com.au/MarketIndices
vii SuperRatings, viewed 26 July 2017, http://www.superratings.com.au/latest-returns/returns