In the last six months, the cash rate set by the Reserve Bank of Australia has fallen 0.75%. It is estimated that cash returns on savings accounts and term deposits have fallen even more. In addition, the percentage of cash in bank accounts paying no, or virtually no interest has increased dramatically according to a recent article from the Australian Financial Review.
The RBA cash rate is now at an all time low of 0.75%. Returns on cash are probably below inflation. It’s now impossible to earn anything like a reasonable return from cash. But here’s how we seek to ensure we get the best results we can.
Limit cash in day to day accounts
Each of our funds has a central bank account with a major bank, through which most transactions take place. This includes the purchase and sale of investments, income such as interest, dividends and distributions, as well as investor applications, withdrawals and distributions. This account pays virtually no interest. We accept that and manage it by aiming to limit the amount of surplus cash in this account. Whenever we have spare cash for more than a few days, we try to make sure it is in an account or other cash type investment that is earning a return.
Make use of “at call” savings accounts
For many years now, we have used at call savings accounts as an alternative to term deposits to achieve a return on much of the cash held by our funds. If you haven’t looked into what is available in this space, it might be worthwhile. There are a couple of advantages these accounts have over term deposits. By far the biggest is that the funds are on call – usually available within 24 – 48 hours.
Online savings accounts can also pay ‘bonus’ interest in various ways. The least attractive are introductory rates – higher interest paid for up to 6 months after you first open an account. This is a one-off benefit, and depending on how much you have to deposit, may not amount to that much extra. Other more attractive options include “savings bonuses” where you get higher interest on the entire account balance for any month in which you make a minimum deposit amount (e.g. $200) and no withdrawals. Finally, some accounts will pay extra if you free to provide a minimum notice period, say 30 days, before withdrawing funds. But this does limit flexibility, much like a term deposit.
So what are the best online savings accounts to use? Well, there are more choices if you have the funds in your own name. For a self managed super fund, family trust or a business, it’s a bit harder, but there are still some good options. Some examples are CUA and UBank (a NAB subsidiary). Both offer above average ongoing rates and a better deal if you deposit a minimum amount per month and make no withdrawals.
Term deposits are not for us.
Many years ago, term deposits offered some flexibility. If you needed to “break” a deposit part way through the term, you could usually do so without any significant penalty. However, in recent years, the bank regulator, APRA, has put tighter rules in place around term deposit classification. This has forced banks to be more strict on limiting early exit from term deposits. If you do end a term deposit early, you will likely find yourself paying a penalty such as a reduced interest rate or a termination fee.
Term Deposits can work well when the “yield curve’ is positive. That is when markets are pricing in future interest rate rises. You can take advantage of that expected increase in rates to lock your money away for longer and get a higher interest rate. At the moment, that is not the case. There is very little if any “premium” available for locking your money up for 12 months or more. That’s because interest rates are expected to fall further over that period. But more importantly, the loss of flexibility and associated “opportunity cost” makes it less worthwhile to chase term deposits.
Exchange Traded Funds.
There are now some attractive cash ETFs to consider. Betashares high cash ETF (AAA) and Pinnacle’s new Zero fee cash ETF (Z3RO) are two examples where the vast majority of funds are held in a bank account or equivalent, and where returns are comparable or better than other options. Just be careful to review precisely what assets the ETF owns before you invest. Some have a high proportion of bonds or other assets which have a different risk profile to cash.
Another type of ETF you might wish to take a look at are foreign currency ETFs. While they don’t usually pay much income, they can provide a way to diversify your cash holdings. This may be a good idea if you think the Australian Dollar might fall in value against overseas currencies. In that case, holding a foreign currency ETF might mean you would make a return from the fall in the Australian currency against the one the ETF holds. Of course, the opposite is true should the Aussie dollar rise against the selected currency, so this is not for everyone.
As one example of what is available, Betashares currently offer ETFs that provide exposure to US dollars (USD), British pounds (POU), Euros (EEU). Similar products are also available from other ETF managers. The ETF Watch website contains a search function where you can view all ETFs available. We have used these sparingly in the past as a way to diversify our Affluence Investment Fund cash holdings.
Even with minuscule returns from cash, it still pays to do what you can to get the best deal. Minimising surplus cash in a transactional account and using online savings accounts are two ways to help. Cash and foreign currency ETFs can provide another option to help diversify and improve returns. Just make sure you understand exactly what assets the ETF owns.
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