I went to the bank and asked to borrow a cup of money. They said, ‘What for?’ I said, ‘I’m going to buy some sugar.’
– Steven Wright
Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement.
– Dan Quayle
Back in the depths of the global financial crisis, our family self-managed super fund was able to do an extraordinary deal. We secured a 5 year term deposit in 2009 at 7.5% per annum. By the time that term deposit matured in 2014, the best we could do was around 3%. And since then, it has only gotten worse. In this market banks have all the pricing power – they currently have more cash deposited with them than they need and are under no pressure to pay above-market rates.
Most investors are currently holding a reasonably significant portion of their portfolio in cash. The latest numbers available from the ATO suggest around 30% of the assets of the average SMSF are cash. Given that, one of the easiest ways to maximise investment returns, and one that it totally within your control, is to ensure you are getting the absolute best deal you can on the spare cash.
Today, the best 1 year term deposit rate according to online comparison site MOZO is just a touch over 3%, from a small credit union. And the best “big 4” bank is offering just 2.40%. That is basically guaranteeing you an inflation-like return. Which means you will be guaranteed not to make any real investment return on those funds.
That might be OK if it came with some flexibility, but for the privilege of earning this wonderful rate you have to lock your money up for a year. And because of tightened capital requirements by the bank regulator, APRA, it is now much more difficult for you to withdraw money from a term deposit early. You will almost certainly be charged a penalty, making the return even more meagre.
The opportunity cost, that is, the chance a much better investment opportunity will come along during that period, is simply too great to commit your hard earned cash for a whole year. One of our key rules at Affluence is that accepting a below-average return on any investment, regardless of diversification benefit, is not worth it. In return for locking up your funds for a period of time, with no easy access to the money, a return of 2.4% – or even 3%, is simply unacceptable.
Of course you can achieve flexibility by leaving your money in a traditional savings account – but many of them pay terrible rates of interest. And the general rule is the bigger the bank – the worse the interest rate. Some savings accounts essentially pay no interest at all – and while we all value the flexibility and the features they provide, if you’re holding a significant amount of cash in one of these account you could be costing yourself a great deal.
There is a much more flexible option than term deposits or the old fashioned savings account – a high interest online savings account. If you haven’t looked into what is available in this space, you are not doing yourself any favours. These accounts have several advantages over term deposits. By far the biggest is flexibility. The funds are essentially on call – available within 24 to 48 hours. This means they make not only a better alternative to term deposits, but they also allow you to move much of your on-call cash there as well.
The next best feature is the rates – generally around 2.5% if you make a withdrawal during the month and as high as 3% if you don’t. For most of us, that’s a much better option than both a term deposit and a run of the mill savings account. Even if your average return is slightly worse than the best term deposit rate – you will have a much greater degree of flexibility and in this investing climate, where prices can move up and down quickly and investing opportunities present themselves regularly, flexibility is key.
So what are some options? Well, the choices are much wider if you have the funds in your own name and are able to open a personal account. Both RAMS (100% owned by Westpac) and UBank (a NAB subsidiary) offer great ongoing rates and a better deal if you meet certain criteria. With RAMS you must deposit $200 per month and make no withdrawals. With UBank you must pair your online account with a normal savings account and maintain a minimum balance.
For a self-managed super fund or a business account it’s a bit harder, but there are still some good options. UBank have one of the best offers for SMSF’s. We also use CUA, which is currently offering 3.05% if you make no withdrawals, reducing to 2.15% if you do. Still on a par with term deposits but with much better flexibility.
If you haven’t given online savings accounts a look – you should definitely get onto it. Do your research and make sure the product you choose is appropriate for your circumstances, but there are not many easier ways to improve investment returns than by ensuring you maximise your income on cash.
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