Where you should invest money as the cash rate continues to tumble
The cash rate is expected to be cut another two times — leaving many Aussies unsure of how to save and invest their money right now. SEE WHERE YOU SHOULD STASH YOUR CASH
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The volatility in the Australian economy has left many people scratching their heads on how to reap decent returns on their hard-earned cash.
The Reserve Bank’s decision to slash the cash rate to a record low of 0.75 per cent, combined with significant falls to the ASX 200 by more than two per cent, non-existent wage growth and rising costs of living make it a tough time to grow your money.
But property prices in Sydney and Melbourne are slowly rebounding and experts explain there are still ways to get decent returns on your money despite the cash rate heading towards zero.
BANK DEPOSITS
Economists including AMP Capital’s Dr Shane Oliver have forecast another two cash rate cuts in the coming months — on Melbourne Cup Day and in February — which would bring it down to just 0.25 per cent.
This is likely to turn savers away from stashing their cash in the bank as deposits rates crumble — figures from financial services firm Canstar found the maximum rates at just 1.8 per cent for “at-call” savings accounts.
“If they want security for their deposits then they should stay with bank deposits,” Dr Oliver said.
Many banks last week failed to pass on the RBA’s cash rate cut in full, meaning savers escaped seeing their deposit savings drop by as much.
CBA was among the banks to reduce savings rates including on their Netbank savings account by 0.05 percentage points.
The bank’s group executive of retail banking services, Angus Sullivan, said it was “not feasible to pass on the full rate reduction to more than $160 billion of our deposits which are at near zero rates.”
Automated investment advice platform Six Park’s adviser Ted Richards said bank deposits remained a good option for those who needed access to cash quickly.
“Parking cash for a short-period of time is what you may need to do to have a certain amount of liquid funds at hand and on disposal,” he said.
MORTGAGES
Dozens of financial institutions announced they would cut interest rates on most of their mortgage products and now the best mortgage deals variable rate loans are as low as 2.74 per cent.
On a $300,000 30-year mortgage this means borrowers are paying $1274 per month, but for those who tipped in extra repayments they could significantly scale ahead.
By increasing repayments by $200 per month, they could shave $30,700 in interest costs and cut six years off the loan term.
Dylan McKibbin, 29, his wife Hayley, 28, and son Jett, 12 weeks, recently refinanced their $450,000 mortgage on their three bedroom home at Westmeadows in Melbourne’s north.
They jumped from ANZ to Macquarie, reducing their interest rate from 4.36 per cent to 3.34 per cent.
“We want to save money and continue to pay down our mortgage at the same time,” he said.
He said his biggest worry was “keeping food on the table and staying on top of the mortgage repayments.”
Mortgage Choice broker Chris Howitt said he regularly explained to borrowers why their rates were not lower.
“Even if rates go down to zero they will never be zero on a mortgage,” he said.
“Banks are really good at offering specials for new customers but those on existing loans are missing out.
“They rely on getting say 100 people in on a good rate, we assume 50 per cent will eventually leave and 50 per cent will do nothing on their mortgage for the next five years and they’ll be on a higher rate.”
MORE NEWS
Five reasons this RBA rate cut matters most
Why big banks won’t pass on full interest rate cuts
Rate cuts: How much you’ll save on your home loan
SHARES
The benchmark share index ASX 200 reached a record high in July at 6875.5 points but as history shows it was a volatile asset class.
It plummeted 2.3 per cent on Thursday and wiped $75 billion from the value, but AMP Capital’s Dr OIiver said despite this the market was “up 15 per cent year to date”.
“The Australian sharemarket provides a dividend yield of around 4.5 per cent and once you add in franking credits it’s above 5.5 per cent,” he said.
“That income flow is quite stable if you have a well-diversified portfolio.”
But he acknowledged there’s been “wobbly patches” and investors needed to factor this in when tipping money into shares.
“Whenever it comes down it comes down with a bang,” he said.
“It’s the nature of the sharemarket that it has these volatile patches.”
Six Park’s Ted Richards urged investors to “set up a diversified portfolio depending on your risk profile”.
“There are now online providers that make it as simple as setting up a savings account and manage this portfolio for you,” he said.
Six Park investors could kickstart a portfolio with a minimum $10,000 but some robo advisers offer smaller minimum amounts to get started.
Listed investment companies such as Argo Investments or Australian Foundation Investment Company also spread people’s money across a wide range of stocks.
And exchange-traded funds also remain a popular way to invest which gave exposure to international markets through the ASX.
SUPER
Throwing extra contributions into super is another option for Australians to grab decent returns, but remember funds are locked away until retirement age.
The Australian Institute of Superannuation Trustees’ chief executive officer, Eva Scheerlinck, said with interest rates at all-time lows it was the perfect time to fatten retirement savings.
“Given that some of the top performing profit-to-member funds returned between 7 per cent and 9.9 per cent in the 2018-19 financial year, adding a little bit to super now can make a big difference to the amount of money you have when you retire,” she said.
“In addition to the strong returns of the superannuation industry, superannuation is a tax-effective vehicle.
“Before-tax contributions (also known as salary sacrificed contributions) are subject to a 15 per cent contribution tax.”