How To Adjust Your Savings When Interests Rates Drop

The Reserve Bank of Australia (RBA) is currently floating some bold ideas to get the economy back on track – including reducing interest rates into negative territory. Instead of gaining interest on the money in your bank account, this means you would actually lose money. So what can you do about it?

Lowered interest rates affect both savings accounts and certificate of deposits (CDs). While nothing has changed yet, the RBA is considering a range of “unconventional” ways to stimulate the economy including reducing the cash rate down to a very low level.

“When we look overseas, we see some central banks have very low-interest rates and some countries have negative interest rates,” RBA governor Dr Philip Lowe said during this week’s Standing Committee on Economics. “In Switzerland right now the interest rate is -0.75 per cent, in the euro area it’s -0.40 per cent and in Japan it’s -0.10. So some central banks have gone negative. That’s one possibility.”

This is good news for people who borrow from banks, as it means you earn money on any loan you borrow. But for bank customers with large saving accounts, the reverse is true: a negative interest rate means you actually lose a portion of the money you’re not spending each month.

If you want to get the maximum value out of your saved income, you have a few options:

Shift your savings into a bank with a better interest rate

Don’t like the interest rate your bank is giving you? Start shopping around for another bank. Online-only banks often provide slightly higher interest rates than brick-and-mortar banks, but it’s important to compare all of the numbers: interest rates, minimum balance requirements, monthly transfer requirements, fees, and so on.

Once you’ve found a bank you like, use our guide to switching banks to make sure you get your funds transferred without making any common mistakes, like falling below the minimum balance in your old account before the transfer is complete and getting charged an unexpected fee.

Build a CD ladder before rates drop even further

If you’ve been thinking about getting into CD ladders and taking advantage of their fixed interest rates, there’s still time. Once you put your money into a CD, you can’t take it out before the CD term ends without paying a penalty, so keep that in mind before you build your ladder.

Put more of your money into the market

Yes, the stock market is “in flux” right now, and yes, we might be headed into a bear market (that’s the bad one). However, if you’re playing the long game and are ready to buy and hold, there’s nothing wrong with getting in while the market is in a temporary dip. Buy low, sell high, right?

If you’ve got some cash above and beyond your emergency fund, it’s worth asking yourself whether you should put that money into the market. Same goes with the money in your checking account, by the way. (If you’ve got more in there than you need, it might be a good idea to put that money where it can earn a higher return.)

Just remember that investments are not guaranteed — and if we do end up in another recession, you might not see those higher market returns for a while — so don’t invest any cash you can’t afford to lose.

Here are some of Australia’s best personal loans: