Cash in the bank? Why your savings could be working harder for you.


Jason Prowd  |  31st July 2018  |  5 min read

Key points:
  • The real return on savings in the bank is negligible after inflation and tax.

  • Managed investment portfolios may offer potentially higher returns.

  • Make your money work harder for you at the risk level you’re willing to take.

The word ‘savings’ for bank accounts just doesn’t cut it any more. We really need to come up with a new name. ‘Stash’ accounts perhaps?

The simple economics of savings accounts tell the story.

Standard variable interest rates at the big four banks are all below 1%1. Even if you put your money in a term deposit the big four offer less than 2.5%1 for 12 months. You might be able to extract more in ‘bonus’ interest, but good luck not getting caught up in all the strings attached, including minimum deposit amounts and limitations on withdrawals.

2.5% might seem ok at first glance. Maybe. But what happens when you take into account inflation – the rising cost of living – which was 1.9% in the year to December 2017? All of a sudden, the real return on your investment is 0.6%!

So, while the dollar value of your savings has gone up slightly from interest payments, inflation has eroded it. Factor in the tax you’ll pay on your earnings and it makes keeping cash in the bank a quick way to afford less of the stuff you want to spend it on. Yeah, it’s a rough deal.

Simply ‘stashing’ your money in your bank account doesn’t sound so good anymore, does it? But to help you make a robust decision on whether cash is right for you, I’m going to share the most common questions investors ask about cash. Hopefully the answers will help you decide if there’s a place for the humble Aussie savings account.

 

Why do people choose cash?

We all understand cash. It sounds safe. We consider it low risk, and it is. Indeed, the Australian Government guarantees deposits up to $250k in Authorised Deposit-taking Institutions (ADIs), such as your bank, building society and credit union. You can access cash any time, and it can come in handy in an emergency. But cash is not without risk. When the purchasing power of your money goes down over time, that is a real financial loss.

 

Why are the returns on cash so low?

It all comes down to the risk and reward relationship. Bank accounts are a low risk investment product; therefore, they don’t need to offer much compensation in return.

 

Aussies aren’t really stashing a lot of cash in the bank, are they?

You’d be surprised. Indeed, on average, Aussies have almost $25,000 in savings accounts (not including their offset accounts). Imagine what we could achieve if that amount was invested!

Here’s a look at how much money people have in banks based on their age group.

 

 

AGE GROUP AVERAGE BANK ACCOUNT SAVINGS
25–34 $10,900
35–44 $16,389
45–54 $21,391
55–64 $28,870
65+ $43,778
ALL AUSTRALIANS $24,650

Australian Bureau of Statistics, October 2017. Calculation of average bank account savings assumes all bank account savings held by adults in a household (aged over 18 years old).2

 

 

How much should I be investing, rather than stashing?

A good rule of thumb is to try and set aside at least 10% of your after-tax salary. So, if you earn the average full time wage in Australia of $81,5302, you could put around $530 a month into savings and investments.

 

But savings accounts are so easy. Is it that easy to invest?

Yes! If you’re short on time when it comes to investing, managed investment portfolios might be the way to go. You choose a portfolio based on the level of risk that suits you and you decide how much to invest. Then let the expert fund managers spend their time managing your money.

 

What might my money be worth in a managed investment portfolio?

We can’t predict the future, but we can get pretty close. Transparency and a high degree of accuracy are important to us at Morningstar, which is why we generate over 500 simulations to give our customers an idea of what the future could look like.

Let’s look at three different age groups to see what your potential balance could be. I’ve based it on the three Morningstar Next managed investment portfolios: Growth (7+ years to invest), Balanced (5+ years to invest) and Cautious (3+ years to invest).

 

 

AGE GROUP Starting average bank balance Years until retirement Morningstar Next Portfolio Potential investment value (takes into account inflation, taxes and fees)
35–44 $16,389 25  GROWTH Between $171,531 and $232,754
45–54 $21,391 15  BALANCED Between $109,789 and $131,829
55–64 $28,870 5  CAUTIOUS Between $58,126 and $63,279

Note: Potential balance based on full bank account savings being invested in Morningstar Next portfolio products, invested for the full duration to retirement, and savings contributions made of $530 per month.

 

The longer you invest the more you’ll earn – thanks to the amazing compounding effect. Even if you’re only a few years from retirement, investing your $28,870 savings in our Cautious portfolio, and putting in your $530 per month savings could be worth up to $63,279 in five years. You can try out different options with your own figures with our interactive forecasting calculator.

 

What is the risk of managed investments compared to cash?

Risk is the potential of losing money that can’t be made back. Every type of investment can go up and down. They key is choosing the right level of risk for your circumstances.

Different managed investments come with different levels of risk depending on what the product is trying to achieve. For example, Morningstar Next’s three investment portfolios offer different levels of risk to suit different investor preferences and stages of life. For example, our Cautious portfolio has 70% invested in defensive assets, whereas Balanced has 50% and Growth has 30%.

And let’s not forget the risks you face with ‘stashing’ cash.  You’ve worked too hard to just throw money away, so make your hard-earned money work harder for you. It’s as simple as deciding the level of risk you’re prepared to take on.

 

— Jason Prowd leads Morningstar Next: ready-made investment portfolios. Get started today

 

Sources:

  1. Based on rates published in finder.com.au as at 18 April 2018.
  2. Australian Bureau of Statistics, Household Income and Wealth, Australia, 2015–16. Released October 2017

 

© Morningstar Investment Management Australian Limited (‘Morningstar’) and any related bodies corporate that are involved in the document’s creation. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third-party providers accept responsibility for any inaccuracy or for investment decisions by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment.  Any general advice has been prepared without reference to your investment objectives, financial situation or needs. You should consider the advice in light of these matters and if applicable, the relevant disclosure document before making any decision to invest. Refer to our Financial Services Guide for more information.

 

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