Bank accounts are something we all have and need these days. Traditionally, there are two primary types of bank accounts: chequing and savings.
Chequing accounts normally don’t come with a substantial interest rate and are primarily used for transactions and the like — which is why they typically come with an EFTPOS card.
However, savings accounts are usually classed as ‘wealth-building tools’ or even ‘investments’. You place your surplus cash in a savings account, where you were traditionally rewarded with a reasonable interest rate — compensation for technically lending your money to the bank. That capital is still liquid (you can withdraw it whenever you want), but you used to expect that the bank would pay an interest rate that would handily cover the effects of inflation each year, and then some.
But that paradigm has long departed from the financial landscape we see today.
See, banks charge interest on loans and pay interest on savings using the official cash rate that is determined by the Reserve Bank of Australia (RBA) each month. So say if the cash rate was 5%, you used to expect a mortgage interest rate of say around 6%, and a savings account interest rate of 4%, for argument’s sake.
But today, the Australian cash rate sits at just 0.25% — a record low. There is some speculation that the RBA will again lower the cash rate this year to a new record low of 0.1%.
So if you’re wondering why your mortgage has never been cheaper to service, that’s why.
Savers are losers
But what’s good for the goose is apparently good for the gander. And if you’ve looked at the interest rate your savings account offers recently, I’m sure you would have choked into your morning coffee.
As an example, Commonwealth Bank of Australia (ASX: CBA) is currently offering a maximum interest rate for a standard savings account of just 0.85% per annum.
That is absolutely pathetic from the perspective of wealth building. I’m not having a go at CBA here, all of the banks’ offerings are pretty similar. It’s purely a consequence of the RBA’s current cash rate.
So what does this mean? Well, even if inflation averages a low-by-historical-standards 1% per annum over the next year or two, your savings will be losing value in real terms.
But here’s the real kicker. Our friends over at the Australian Taxation Office (ATO) don’t take inflation into account when assessing your taxable income for the year. And interest received from a savings account is taxable income. So not only is your money going backwards, you have to pay tax on the interest that slows this decay. You’re almost no better off than keeping your cash under the mattress.
So what’s the solution? I believe you need to invest. No one ever really saves their way to significant wealth. And in 2020, you’re swimming upstream.
A solution?
In contrast, ASX shares have consistently given investors inflation-smashing returns (albeit amidst the odd market crash).
Take a plain-jane S&P/ASX 200 Index (ASX: XJO) fund like the SPDR S&P/ASX 200 Fund (ASX: STW). This exchange-traded fund (ETF) has returned an average of 7.31% per annum since its inception in 2001. And, being an ETF, it’s one of the easiest investments on the ASX you can own.
So when I encounter people who still have all their cash in the bank, I usually recommend them to take most of it out and, instead, put it into shares. I also suggest keeping an adequate amount in the bank for emergencies and savings, of course. You never want to be in the awful position of having to sell shares to fix your car or go to hospital. But if you think you’re getting a good deal having your life savings in a bank account, I respectfully believe you are mistaken. As the old saying goes, the best time to plant a tree was yesterday, and the second-best time is today.
More reading
- 5 ASX 200 events to watch for this week
- 5 things to watch on the ASX 200 on Wednesday
- CSL (ASX:CSL) share price and 2 other ASX stocks among latest broker “buy” ideas
- The ASX 200 slid 0.72% lower today
- Is the ASX 200 trading too high right now?
Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The post Warning: Here’s why keeping your savings in the bank is hurting your financial future appeared first on Motley Fool Australia.
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