What interesting times we live in. Despite the Reserve Bank keeping the cash rate on hold since last September, interest rates on savings accounts are creeping higher. At the same time, intense competition is helping to push home loan rates lower.
According to comparison site RateCity, one in five online savings accounts are paying interest of 4% – though it’s possible to do better. ING DIRECT and UBank for example both have savings account paying 4.35% or more. It means your spare cash could earn close to double the official cash rate of 2.5%. These are very interesting figures – especially when you consider that some of the cheapest mortgages cost less than 4.0%. As a guide, IMB has a home loan with a 1-year fixed rate of 3.99%. That’s right, you can now find home loans at lower interest rates than savings accounts.
The bottom line is that savers are well-placed to earn a decent return. With the nation’s households collectively holding a record $831 billion in cash and term deposits, it’s definitely worth checking that your money is earning a competitive return.
However, if you don’t have some spare cash to your name, now is a good time to get into the habit of saving. Adopting a few proven strategies can make it easier to get going. Setting some goals – a key savings strategy – often provides personal motivation. But don’t overdo it – stick to saving goals that are realistic, and keep track of your progress.
For a bit more motivation, there are plenty of online calculators that can show how much you need to set aside each pay day to meet your cash target. Check out the ‘savings goal’ calculator on the government’s MoneySmart website (moneysmart.gov.au) or see what’s available on your own bank’s website.
One way to make saving easier is by arranging a regular automatic transfer from your everyday account to a high interest savings account. Or talk to the boss about having part of your pay cheque deposited directly into your savings account each pay day while the rest goes to your transaction account. Even if you only save $50 each week or fortnight, you’re making a good start towards growing a pool of savings.
Importantly, treat savings like an expense – something that has to be paid just like a phone or power bill. Some of the highest rate savings accounts pay bonus interest if you make deposits of a certain value each month, and this can be a compelling reason to keep tucking money away.
Bear in mind that while savings accounts and term deposits are a safe investment, you won’t benefit from capital growth. In fact, over time, inflation will eat away at the spending power of your money. So as your savings pool grows – as it will if you maintain your savings habit, you can start to consider diversifying into other investments.
A managed fund can provide access to a wide variety of investments. Well-chosen shares can provide long term capital gains; and an investment property can be a source of regular rental income plus potential tax breaks. With the benefit of some savings it’s a lot easier to get started in these asset markets, setting you on your way to financial security. In my book that’s a great incentive to kick start a personal savings regime.