Cash and high interest savings accounts are dead

It’s the one thing most Aussies do with their savings - but they are missing out of huge potential financial rewards.

Financial adviser Ben Nash on the real reason cash is dead.

Most people don’t realise it, but if you have money saved in cash, it’s going backwards.

This happens whether you’re saving money in a bank account or physical cash, and even if you have your money sitting in one of the highest interest cash savings accounts in the market today.

You might think I’m crazy – because when you look in your bank account the balance is probably increasing, or at least staying at the same level. But if you’re looking at just the balance alone, what you don’t see is the impact of inflation.

With inflation, the cost of goods and services are increasing every year. Over the past 12 months, the rate of inflation was 5.4 per cent, meaning that on average things have increased in cost by just over 5 per cent in this time.

If you’ve got money sitting in a high interest savings account, the highest rate of interest available in a savings account today is 5.75 per cent, meaning interest earned is just above inflation.

Even money in a high interest savings account is going backward. Picture: Unsplash

But, interest income is taxable and under the current tax rates and rules, if you earn above $45k p.a., your marginal tax rate is at least 34.5 per cent, meaning you lose over a third of your interest in tax.

You can calculate your after tax interest rate as follows:

After tax interest rate = (1 – marginal tax rate) x before tax interest rate

In this case, this is:

After tax interest rate = (1- 34.5 per cent) x 5.75 per cent

After tax interest rate = 3.77 per cent

This shows that after inflation and tax (real) terms, any money you have in savings today is going to be worth less in a year’s time.

Looking at the impact of this over the long term, the results are a total disaster – even though your savings balance may be increasing, the money buys you less so you end up behind.

So what can you do instead?

If you want your money to grow, you need to use investments with higher long term returns. I’ve included data from Vanguard and Canstar showing the 30 year long term returns of different investments:

You can see from this table that all investments outside of cash and bonds have much higher long term investment returns.

This suggests that if you want to get ahead, you need to be looking at investments outside of simply saving in cash alone. The good news is that if you do, you’re rewarded with higher long term returns, and your money is not just keeping up with inflation, but growing faster than inflation to actually help you get ahead.

You have to get started (now)

It should go without saying, but just to say it – once you know what you need to do, you need to actually do it.

One of the best things about saving in cash is that it feels good. Everyone understands cash and how it works, it feels safe – and it is with the Australian government guaranteeing bank deposits up to $250k.

If you’re going to invest your money into something other than cash, particularly if you don’t have a lot of experience investing, it can feel a little scary.

If you want your money to grow, you need to use investments with higher long term returns.

You don’t want to make a mistake you later regret, and because there’s comfort in the safety of what you know, it’s easy to get stuck in the inaction trap.

If this happens to you, know that it’s completely normal. But also know that if for every day or week you stay there, you’re costing yourself money – and that your money is going backwards in real terms.

This should give you the motivation to push through the fear and take action.

One of the most effective ways to get comfortable with doing something new, whether it’s for your investing or anything else to do with your money, is building your knowledge and understanding.

If you haven’t invested before, you won’t understand all of the ins and outs, what the risks are, and how those risks can be managed. But take the time to build your knowledge and educate yourself, and this can change quickly.

The wrap

With all the noise in the world today, you’d be forgiven for thinking that the smartest move would be to hold on tight and wait for the storm to pass. There’s comfort in the known, and when you save in cash you can see it, touch it, and understand it – and that feels good.

But you need to know there’s risk in every move, even if that move is doing nothing or just saving in cash – it’s just that risk is often invisible, sitting below the surface.

But doing nothing other than just saving money is a risk, and it can be a costly mistake. Particularly in market downturns like we’re seeing today, sitting on the sidelines is a dangerous game.

Ben Nash is a financial adviser and founder of Pivot Wealth www.pivotwealth.com.au, a money management company that helps people invest smarter. You can follow Ben’s content here: Podcast | Free events | Books | Instagram | TikTok | Facebook

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.