How to stop your savings sliding backwards as rates hit new lows

Frustrated savers look likely to be stuck with paltry returns from cash deposits for a long time, but there are alternatives that can deliver a much bigger windfall.

If you’ve got money in a savings account, it’s about to officially hit reverse.

When the Reserve Bank makes its next interest rate cut — potentially in November or December — you’ll be watching your cash returns moonwalk out the back door.

That’s because the average term deposit rate is now below 1.6 per cent, the best bonus interest rates offered by big banks are around 1.6 per cent, and Australia’s official inflation rate is an identical 1.6 per cent.

And then income tax takes a bite out of your savings account interest too.

Last week Westpac and its subsidiaries including BankSA became the final big four bank to cut savings account maximum interest rates by 0.25 per cent, yet all have cut variable mortgage rates by less than that.

My savings account pays me what? Maybe it’s time to consider other options.

Banks might say they’re balancing the needs of borrowers, savers and shareholders after this month’s official rate cut, but their actions speak louder than their words.

Low rates look here to stay, but fortunately there are other options for you to stop your savings going backwards.

PERSONAL DEBT

If you’ve got a credit card charging around 20 per cent interest, a personal loan charging 10 per cent or any other high-interest debt, it’s by far the best place to park spare cash.

Reducing an outstanding credit card debt gives you an effective interest return of 20 per cent — much better than 1.6 per cent on your bank deposits.

YOUR MORTGAGE

For people without expensive consumer debts, another good investment is the home loan.

Mortgage interest rates are at record lows near 3 per cent, but if you transfer spare cash into an offset account or redraw facility you’re still earning double the interest of bank deposits.

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BUY THE BANK

The old investment saying that it’s better to own the bank rather than bank deposits has never been truer.

Bank shares are paying dividend incomes above 5 per cent, and that’s before you add tax benefits from franking credits that push income yields well above 7 per cent.

The share price of the nation’s biggest bank, the Commonwealth Bank, has also jumped about 20 per cent in the past year.

It’s an impressive return, but also much riskier than cash in the bank — especially with the share market near record highs and so much global financial and political uncertainty splashing around.

A more diverse share portfolio — rather than just owning banks — is a safer option but still carries risk if sharemarkets sink.

OTHER PEOPLE’S LOANS

Less risky than shares but more risky than cash deposits, there’s a pile of options to earn income from the debts others.

While government bonds are boring, pay low interest rates and have negative investment returns when rates eventually rise, corporate bond funds can offer better returns and spread money across many quality companies.

There’s also a new breed of marketplace lenders, such as RateSetter and SocietyOne, that bypass the banks and help investors earn income from personal loans.

@keanemoney

Originally published as How to stop your savings sliding backwards as rates hit new lows