If you’re working hard to save, but it still feels like your money is going backwards, this one is for you.
By Alex Brophy
Your savings are in a super tough spot right now, with low mean interest rates and stubborn inflation conspiring to eat away at the value of your cash.
You see, consumer prices increased at an average rate of 2.5 per cent a year last year, compared to 0.89 per cent the year before. And that rate increased as the year progressed (hitting 3 per cent for the September quarter), meaning we’re buying less with one dollar today than we were even six months ago.
To make sure your money can buy at least the same amount at the end of the year as it can today, you need to be earning a return on it. In the case of cash stashed at the bank, you’re relying on the interest rate on your account to earn that return. Currently, savings accounts are not keeping up.
How much do you need to earn?
In a tax-free world, the return on your money would need to be at least 3 per cent to make sure your savings are worth the same at the end of the year as they are now (based on September 2021 quarter 3 per cent CPI).
But given the tax man is going to come along at the end of the financial year and demand a slice of any interest earned, we need to factor in his slice too.
To calculate how much that is, let’s take the most common marginal tax rate of 32.5 per cent (that’s the rate of tax paid on earnings between $37k and $90k, including the Medicare levy).
When you factor in paying 32.5 per cent of the interest you earn in tax, the interest rate you need to be earning to maintain the value of your savings at the end of the year jumps to over 4 per cent.
That’s just to make sure your savings aren’t going backwards. To increase your purchasing power over the year, you need to be making even more.
What are banks paying now?
The latest data from comparison site Mozo shows the average introductory rate on savings accounts is 0.36 per cent. That’s right, less than half a per cent. And that’s the introductory rate, or the rate lenders use to lure people in to save with them. Some lure, right?
If that’s the best rate they can offer, imagine what they’re offering customers they’re not trying to lure? Probably a sum total of nothing per cent. So, you’re not imagining your money going backwards – it actually is.
If you haven’t already, now is the time to log into your online bank accounts and see exactly what rate they’re offering. Chances are, the purchasing power of your savings is deteriorating rapidly while it sits in the bank.
So, what can you do about your money going backwards?
There are limited investment options for small savings balances. But there’s still a good chance you can be doing better than your current savings account.
Here are three ideas.
- Shop around other banks and credit unions to find a better rate. Often superior rates are offered if you make regular deposits into the account. So look in whether this is an option. It still might not cover the 4 per cent needed to grow your money, but it will be better than the rate you’re on.
- Research other lending options. These could include term deposits and peer-to-peer lending, where you’re matched with credit worthy borrowers at a better rate than most banks offer. There is a stack of good ideas here: Alternative investment avenues you might not have thought of
- Consider investing in shares. New investment management services like Stockspot, Raiz or Six Park make getting started investing very easy and affordable for sharemarket newbies. With a 10-year average 10 per cent return on the ASX, shares are definitely going to stop your money going backwards.