Are Rubbish Rates Shrinking Your Cash Stash?

Don’t shoot the messenger, but now is not a good time to be a saver. Savings account rates have been shrinking steadily over 2014 despite the fact the official cash rate hasn’t budged. The average ongoing savings rate is now a measly 2.55%, down from 2.95% this time last year.

Piggy bank picture from Shutterstock

What’s more, the additional headache of rising inflation — up to 2.9% in the March quarter — means it’s becoming a real challenge for savers to eke out real returns once inflation and tax are taken into account. In fact the majority aren’t getting ahead, they’re actually going backwards.

When the team at Mozo.com.au ran the numbers, we found that a saver on an average annual income of around $60,000 will need to earn an interest rate of at least 4.14% on their savings to make any ‘real’ return after tax and inflation.

And here’s the kicker. Currently a mere 6 out of 111 savings accounts offer a rate of 4.14% or more, and most of these are introductory rates that only last a few months.

Term deposits aren’t better — in fact they’re even worse as you’ll have to lock away your dough for at least three years to earn a 4.14% interest rate. You may as well stash your money under your mattress!

The situation gets even more dire the more you earn. If you rake in $80,000 a year, you’ll need a steep 4.60% rate to see your greens blossom. In the entire savings market we only found one savings account offering 4.60% (ME Bank), and then only for 5 months.

It’s not the end of the world but this should be a red alert to most of us. So rather than give up entirely and blow your cash on a life size replica Iron Throne, here are some tips to help savers beat the double whammy of rubbish rates and rising inflation to get their returns back on track.

1. Start “rate-tarting”. Compare rates online and switch savings accounts every few months to get the best introductory rate deals in the market. You’ll get a great rate while it’s hot and switch when it’s not.

2. Drop your debt. Divert savings into your home loan or credit card to turbo-charge your repayments. Credit card rates average 17% so it makes no sense to have money sitting in a savings account at sub 3% when you’re carrying credit card debt at a much higher rate.

3. Offset your savings. By depositing a typical salary into an offset account attached to a $500,000 mortgage you can save at least $2000 a year in interest. And because you’re not earning compound interest you won’t be taxed on it.

4. Diversify your investments. Holding a varied investment portfolio – cash, equities, property and increased super contributions – will help you beat inflation and give your savings a boost. Having a finger in many financial pies will also minimise your investment risk.

5. Create a share portfolio. If you’ve got a good appetite for risk you could seek a better return by investing in shares. You’ll want to start with a minimum of $500 to ensure fees don’t eat away too much of your investment. Build your portfolio over time by using monthly savings to regularly add new stocks.

6. Track the index. Exchange traded funds (also known as index funds) are a good option for stock market newbies as they are an easy and low cost way to get instant diversification. Vanguard has numerous ETF options for retail investors with $5,000 or more to invest.

7. Invest in a managed fund. Managed funds offer the chance to beat the index but can come with higher fees, ranging from 0.5% to 2.5%. They can be a good option for investors wanting to make ongoing contributions from their savings.

Kirsty Lamont is a director of Mozo.com.au which helps Australians compare savings accounts, credit cards, insurance and other financial products. Kirsty was one of the launch team for Virgin Money when it started in Australia in 2003, and also held a senior role at BankWest before joining Mozo in 2007.