Cash: Alternatives and options

Earlier this month we saw the final nail in the coffin of cash returns, with the Reserve Bank of Australia (RBA) reducing the nations interest rate to just 0.1%.

A quick look on comparison sites and you will see the number of saving accounts offering over 1% reducing daily and those that do offer a higher rate probably only do so for a few months on a ‘welcome’ rate.

We always bear in mind inflation when discussing cash – inflation being how much our day to day costs are rising. You’ve probably heard me talk about ‘Real Returns.’ If I hold a bank account earning 1% interest but the typical goods I’d spend it on have gone up 2%, my real return is -1% per year.

Inflation over the last ten years in Australia has averaged 2.1% per year with the average Cash investment being 2.7% over the same period, so your typical cash investor might have scraped a 0.6% real return. And then paid tax on it.

The next ten years could well look very different – the RBA have already said that the base rate is unlikely to rise for at least 3 years.

Now whilst I am loathed to make predictions, I would not be surprised to see inflation start to rise for a number of reasons.

Remember than magic money tree the Government found to pay Jobkeeper?

Well that has left a big black hole in the country’s wallet to the tune of over $100bn.

The easiest way for the real value of that debt to fall is for inflation to rise – if wages, property and the cost of a loaf of bread creep up, the Government makes more in income, property and sales tax.

By using their tools to increase inflation, rather than simply apply higher taxes, the mental pain to the taxpayer is diluted.

‘Hey, a loaf of bread is 50c more!’

‘Never mind that, you won’t believe what our house is valued at!’

Secondly, as a collective if we’re not earning much on our savings, we’re more likely to spend.

The incentive for your average saver just isn’t there compared to the gratification of purchasing. This will have a push upwards on prices.

These things considered, cash savers could see negative real returns for some time.

What are our alternatives to cash saving? There are few things that offer the single major benefit of cash, which is a lack of volatility but consider:

-          Using an offset account if you have a mortgage. Your effective interest rate becomes the rate paid on your mortgage.

-          Paying down debts or mortgages, either in full or at a faster rate.

-          Gift money now you had set aside for later – for children, grandchildren etc. It’s better they spend $100 now than $100 in 5 years’ time when it’s spending power might be 10% less.

-          Consider an investment account with a lower risk profile than your Super is invested at. Some potential downside with this option but should still beat cash over the medium to longer term.

Above all, our golden rule will always be to only keep as much cash as allows you to sleep easily at night.