Tue 17 May 2016

Low interest rates are generally good for mortgage holders – it means people are more likely to pay on time and take out more loans. But if you’ve made cash investments, such as in term deposits and savings accounts, low interest rates actually work to your disadvantage.

Now, investing in cash is a good way to diversify your portfolio, and as a result give you some much-needed peace of mind. But at the same time, it pays to check the numbers and see whether cash investments will actually help you achieve your financial goals sooner. The money might be better invested somewhere else.

These days, interest rates are ridiculously low. As of July 2015, the Reserve Bank of Australia’s cash rate was at 2%, holding steady, but rates for term deposits and online savings accounts have been falling. Online savings accounts have interest rates hovering around 2.55%, while term deposits aren’t much better, at around 3.55%.

It’s easy to make the mistake of simply taking interest rates at face value – but after all, the impact of tax and inflation need to be factored in as well. Taken into consideration, interest rates for cash investments may be very, very low indeed.

Our suggestion: Consult your financial planner, as there are many alternative vehicles to invest your money in besides cash. Here are some of our recommendations.

  • Finding entities that offer better savings rates
  • Establishing a savings plan that diversifies your cash investment over other asset vehicles, such as property, company shares, and fixed interest.
  • Use your savings to pay your high-interest debt, such as car finance, credit cards, and personal loans.
  • If you have an active home loan (or are planning to open one), put the cash in an offset account to save on interest over the long run.

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