Working hard for the money? Make it work hard for you

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The power of savings is instilled in us from a very young age. The $2 you got from the tooth fairy or the $5 from mowing the lawn could buy you plenty of sweets at the milk bar, but you’d need to be patient if you wanted to afford that big ticket item. For me, that was a pair of those shoes with flip-out roller skates built into the sole, but for other kids, it was probably something cool like a PlayStation 2.

A savings account is not necessarily the best place to keep your hard-earned.Credit: Aresna Villanueva

While schools did a decent job of teaching us about the power of compound interest and the like, our learning stopped around there. This is probably sufficient knowledge for a child who could struggle to imagine things more expensive than a $200 pair of fancy roller skates, but as adults, it’s left us wanting.

What’s the problem?

In Greta Gerwig’s recent cinematic masterpiece Barbie, there’s a joke where one of the Barbies says she “just keeps all her money in a savings account”, much to the dismay of Finance Bro Ken. By some accounts, this throwaway gag has cut a bit too close to home for some moviegoers, prompting some reflection about what you should do with your hard-earned other than just keeping it in a savings account (and losing money due to inflation).

On average, Australians have $34,000 in savings according to NAB, though this varies wildly by age and is heavily weighted to older Australians, with younger generations more likely to have about $10,000, or less. Often, those savings are earmarked for something, such as a new car or a house deposit, but regardless, there’s a good chance you could be making better use of the money you’ve got sitting in the bank.

What you can do about it

To answer this question, I turned to some of The Age and The Sydney Morning Herald’s eminent Money experts to get their advice:

• Add to your super: Financial advisor Paul Benson suggests if you’ve got savings in the bank that you don’t have any immediate plans for, adding it to your super is a great way to turbo-charge your retirement savings. Even more so for people earning under $43,445, as the government will co-contribute an extra $500 if you put $1000 into your super fund as an after-tax contribution. “If your income’s too high to get the co-contribution, perhaps you could make a contribution to your spouse’s super,” Benson says. “If your spouse earns less than $40,000 you could contribute $3000 into their super fund, and you will receive a $540 tax offset. This is an 18% return, risk-free.”

• Go long-term: Money columnist Nicole Pedersen-McKinnon says right now could be the “sweet spot” for savers willing to lock their cash away in term deposits for a few years. “It looks like we are at or very near the interest rate peak. Not that rates will come down soon, but when expectations turn to rate cuts (rather than hikes), that’s when term deposit rates fall,” she says. “If you lock in ahead of that, you could do very well indeed.” Currently, some of the best term deposits on offer could see you earning 5.35 per cent, per year, over three years.

• Give your mortgage a helping hand: Noel Whittaker, finance expert and long-time Money columnist, says putting your savings to work through an offset account can be one of the best things to do with your spare cash, calling it a “perfect investment”. Not only do you not lose access to your funds, but it “earns” the equivalent of your mortgage rate, which currently sits around 6 per cent.
• Invest in shares: This option isn’t for everyone, as you need to be both a) happy with a certain level of risk and b) willing to ride out market swings for at least five years, but putting your savings into shares can provide solid returns. “If you can take a medium-term view, regular investments to an index share fund would be good,” Whittaker says. “You would get the benefit of dollar cost averaging and receive around 4.5 per cent franked on your money, plus capital gains.”

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.