My eye-watering returns
When I look at my bank balance these days, I have the same reaction as getting a COVID test up the schnozz:
Eye-watering pain.
See, as a lifelong saver, it pains me to see the amount of interest I’m earning on my so-called ‘high interest online savings accounts’: a tearful 1.5% per year. On a lazy 10 grand that’s a whopping $150 a year.
Ouch!
But I guess that’s better than nothing, right?
Actually it’s worse: after I pay tax on the interest, and then account for prices rising (inflation), I’m in the red.
Yep, the money I have in my savings account is guaranteed to lose me money.
And remember, that’s with me earning a (relatively) decent 1.5% per year. If you’re saving with one of the Big Four, you’re probably not even earning half that. According to comparison site Mozo, over the last six months banks have cut the interest on 1,479 savings accounts and term deposits. And they’re likely to keep cutting, with the Reserve Bank of Australia (RBA) considering another rate cut as early as next month.
When will it end?
The RBA has said that it expects rates will be low for the next three years. At least.
Pass me a hanky, Daddy’s got a nosebleed!
Yet don’t cry for me Argentina. Of all the people who write to me, there are two groups I feel most sorry for: young people saving for a house deposit, and retirees trying to live off term deposits.
While they’re at opposite ends of the limbo stick of life, they both ask me the same question:
“Should I invest some of my savings in the sharemarket?”
You can see their logic. After all, the week after last the share market went up over 5%.
In a week!
However, my answer is always the same:
Never invest money in the share market that you’ll need — or think you may need — in the next five years. It’s just too risky. Chances are you could lose a chunk of your money. When you think of it that way, 1.5% doesn’t sound so bad after all, right? So keep your short-term cash in a boring savings account that’s covered by the government guarantee (up to $250,000).
Still, I know it sucks.
To deal with the post-traumatic stress of low rates, I’ve had to reframe the role that cash plays in my financial life. What cash buys me most is peace of mind. It gives me options in a time of crisis. And if there’s one thing we’ve learned in 2020, it’s that the world is a very unpredictable place.
And that’s the rub: interest rates are said to be at their lowest levels in 5,000 years (and remember the pharaohs didn’t even have AfterPay). This is discouraging people from saving, and encouraging them to borrow up big and take risks. History tells me this will (eventually) end in tears.
Tread Your Own Path!