The Reserve Bank’s recent 0.25% rate cut may have brought joy to anyone with a home loan. But if you have cash on deposit the latest rate cut makes it even harder to earn a decent return on savings.
Australians collectively have around $780 billion in cash deposits, and according to comparison site Finder, the May rate cut could see households lose a total of around $1.9 billion in interest earnings this year.
Low rates are especially troublesome if you rely on savings as a source of income, or to grow funds for personal goals like a first home deposit. Five years ago we were enjoying term deposit rates as high as 6%. Today the average rate on a 6-month term deposit is less than 3% on a $50,000 balance. It means savers have seen their interest income virtually halve.
Even in a low rate environment, cash can play a valuable role in investment portfolios. But the key is to look for savings accounts offering that little bit extra in rates.
Importantly, don’t just assume your money is earning a competitive return. Since the Reserve Bank’s official rate cut, some banks have trimmed their term deposit rates by 0.3%. Others, like ANZ, have bucked the trend by increasing rates on some term deposits. So take a moment to know exactly what your savings are earning, and compare this to what’s being offered elsewhere.
If you reckon your money could earn a better rate in a different account, be sure to read the fine print so you’re aware of any fees and conditions. You may face limits on the number of withdrawals you can make to earn bonus interest. Or you may need to bundle a savings account with an everyday transaction account to earn the maximum rate.
Something to watch for is honeymoon rates that drop to a far less attractive revert rate once the introductory period expires – usually after four to six months. In theory it’s possible to maintain a high return on your cash by continually switching between banks but it’s a fair bit most of us wouldn’t keep up with this sort of strategy for long. It’s just too much hassle.
An easier approach may be to look for a bank paying consistently healthy rates on savings. Be prepared to think outside the square. Some of the smaller banks, building societies and credit unions are offering rates on savings of more than 3%. It won’t make you rich overnight but in a low rate world every bit counts.