Have you ever thought you were doing something good for yourself only to find out it was having the reverse effect? Having a high-interest savings account might feel like that at times.
You have an extra coffee in the afternoon to wake you up, but feel even more tired afterwards. You put your expensive jacket in at the dry cleaners, but it comes back ruined.
Unfortunately, the same can be said for many Australians who keep their savings in a high-interest bank account.
If the prices of the things you want are rising faster than the interest you’re receiving, you’re actually going backwards.
This situation is now common for many Australians because interest rates have risen, but inflation has risen faster.
It means that, even though your number in the account goes up, the ability to buy things with that money goes down. In real terms, you’re losing.
Interest rates matter massively
Interest rates were at a historical low lately, but are now up as high as they have been in a decade.
High interest savings accounts are designed to mimic the official cash rate set by the Reserve Bank of Australia (RBA), but often come with caveats for customers to actually get the rate advertised.
Sometimes there is an upper limit set on the account or a minimum deposit per month, with punish both low and high savers.
Sometimes there is an introductory rate as a teaser to get you to switch banks, but which expires after a few months, returning you to a lesser rate.
There is a solution to this, however, that doesn’t come from a bank, but rather from the stock market.
Exchange traded funds (ETFs) are financial instruments designed to track a market, and there’s several that simply track the price of cash.
The process is simple: you invest in the cash ETF, which then can pool all the money from all the investors and go to the banks to get the best possible rate, which is always higher than the cash rate and better than what you’d get if you went to the bank as an individual.
There’s no maximums, no mandatory top ups, no introductory rates – and when the bank with the best rate changes, you keep up without having to switch your account.
If Bank of Queensland has the best rate one month but Rabobank has it the next, you’d have to have two accounts to take advantage, but with a cash ETF that holds both, you get the new rate anyway.
From a client’s perspective, cash ETFs are the same as a savings account but instead of one bank, you get the best possible price without having to satisfy any other criteria such as mandatory deposits or capped accounts.
You can buy in and buy out like any ASX share, with a two-day turnaround to get your money. Stockspot Savings allows you easy access to exactly cash ETFs simply by signing up.
How to beat inflation by investing
The cost of living is hitting people across Australia in the pocket. Everything from housing to healthcare, food to fuel and even the price of a beer or a coffee has gone up.
Anyone attempting to save has to continually do the maths on the rate they get from their bank, the rate of inflation and the difference between the two.
In July 2024, the cash rate is 4.35% and you can get high interest savings accounts that pay around above 5% – and inflation has only recently fallen to lower than that.
If the RBA can get inflation into its desired band of between 2-3%, then a 5% savings account isn’t that bad – but that’s a big if.
Investing can you get ahead of your savings account
We’ve ascertained that high interest savings accounts aren’t an ideal way to grow your wealth. At best, they’re a way of treading water with inflation.
Cash ETFs can help you do the same, with added benefits of being much easier to use, with fewer catches and stipulations, while maintaining the same returns over the long term.
If your investment horizon is less than three years, it might make sense to use a Stockspot savings account, which gives access to cash ETFs, as a way to maximise returns on your savings while having your money available at short notice.
Beyond that time frame, investing in a broad portfolio of shares, bonds and gold over a long period has been proven to be one of the best ways to beat inflation and grow wealth.
Over the 30 years to 30 June 2024, Australian shares produced a total return of 9.3% p.a. which was well ahead of bank interest and inflation even after factoring in taxes.
The after-tax return to investors on the lowest marginal tax rate was even higher as a result of tax benefits like franking credits that are available to investors in shares.
Investing can be a riskier option in the short-term than leaving your money in the bank because investments can go up or down on a day-to-day basis.
However by diversifying your portfolio (i.e. having a mixture of investments that complement one another) you can reduce that risk significantly compared to picking individual shares.
Stockspot offers a wide range of ETFs – not just cash ETFs! – that are a good option for those looking for exposure to some of the best performing shares on the ASX at a low cost.
Whilst investing can be a good option, we do think it’s important to keep some money in the bank for the proverbial rainy day.
This is to ensure necessary funds are available to access if you ever need to cover unexpected medical costs or expenses between jobs.
We recommend having six months’ worth of expenses in a savings account before considering any investment.
By having a good mix between savings and longer-term investments, you’re better armed to ensure your funds are working hard for you, rather than have them going backward.
Cash ETFs with Stockspot Savings can provide an easy way to get the most out of those savings, while Stockspot’s portfolios of regular ETFs are there for when you are ready to take the next step on your investment journey.
Find out how Stockspot makes it easy to grow your wealth and invest in your future.
