Thursday, 10 October 2013

High Interest Savings Accounts are starting to pay very low rates

Interest rates are probably the one financial metric that almost everyone has a handle on.  People generally know the official cash rate and also know what they are paying on their mortgage as well as the rate they are getting on their savings.

Conventional wisdom is that decreasing interest rates are good - but this is only for those who have loans - if you have cash savings (especially in bank accounts) - then you are disadvantaged when the official cash rate comes down.

Australia is now starting to experience what many in western economies have been experiencing for a while - interest rates so low that the amount you earn (even on high interest savings accounts) that you are barely keeping up with inflation and you are certainly not earning a decent return on your invested capital.

Check your high interest accounts - you may be surprised how low the rate is

I have a high interest account which I use primarily for expenditure smoothing and I realised recently that I was only receiving 2.5% p.a. on this account.  I did a quick check of other high interest savings accounts and I realised that they had all come down as well.

The best rates I could find were introductory rates which were around ~4.5%.  I have written before about how to roll the best introductory rates available which should help you keep the rate up if you really want to stick with savings accounts.  However these accounts were limited as well - some of them had maximum cash levels for the high rate (e.g. you would only get this high amount up to $10,000) while others would not let you withdraw at all or required a minimum deposit each month without any withdrawals.

The first thing that you need to do is to check your current high interest savings account - find out whether you are getting a rate of interest that you are happy with.  I would suggest that anything less than the inflation rate (~2.5%) is not
worth it - you are not getting anything for your investments.

If you want cash savings...then maximise your interest by switching accounts

If, for some reason, you do not want to buy other asset classes (e.g. property or shares) because you do not understand them or because you need the cash in the reasonable short term for some other purpose then you need to find a way to maximise the interest rate you receive.

The way to do this is to go for short introductory interest rates and then switch accounts as I have posted about before.  It takes a bit more effort and you really need to keep on top of when you can and need to switch as well as all the offers that are currently in the market - there are comparison sites which can make your life easier.

If you don't need cash savings then consider other investment classes

When interest rates are particularly low, there is an incentive to borrow to invest.  Your borrowing costs are very low so it is easier to leverage up more.  I am not suggesting that you should leverage to the hilt - in fact this is silly because you should always assume that interest rates are going to increase however the low interest leverage can really start to accelerate your return.s

In an upcoming post I will explore the idea of using leverage in your investment portfolio and how to keep it sensible and your leverage under control.

You May Also Be Interested In
How to get the most out of high introductory bank savings rates
Why banks don't pass on the full rate cut to home owners
Positive Dilemma: Is it an issue if your investment property becomes positively geared?
Price comparison websites: Friend or foe?


  1. You make a great point there, it really depends on what you are using the $$ for.. Personally I'm saving for an IP (Investment Property) and it's a bit counter intuative to have this in other growth assets that have greater volatility (i.e. shares or even fixed interest)..

    For anyone who is underutilising growth asset classes though, unfortunately they will probably see their $$ eroded by inflation.. Having said that it can depend on the stage of life that an individual is in and interest rates are unlikely to stay this low forever.. Good post 90M

  2. Is there any reason that you use an online saver rather than leaving your money in your offset account? You would earn a mich higher, tax free return on money left in an offset account.

    1. Hi William - great pick up. I know exactly where you're coming from and I completely agree with your rationale. I actually have an high interest savings account for neatness.

      The cash that goes into my high interest savings account is primarily used for near term spending and smoothing. The balance on this account rarely gets above ~$5,000 but there are a lot of transactions which go though this account (i.e. withdrawals and deposits). I use that account to keep my investment account (the offset one) relatively clean.

      Given how I use it the difference financially is negligible.