AUSTRALIANS are losing hard-earned money by leaving their cash in low-interest transaction accounts rather than term deposits.
New Reserve Bank data shows “current deposits” are growing at their fastest rate in almost 2 ½ years, while term deposit growth remains flat, an analysis by CommSec has found. “Funds in low-yielding current accounts have grown at a 9 per cent annual pace,” it says, adding that consumers and businesses remain conservative about investment opportunities.
CommSec chief economist Craig James says while consumer confidence may improve in the year ahead, many people with cash in current deposits see it as “safe and not going anywhere”. “Some people just think much more now about capital preservation rather than the return they get on their funds,” he says.
However, this conservatism can mask the fact that people who store cash in transaction accounts are missing out on income and effectively sending their wealth into reverse. That’s because transaction account interest rates average 0.19 per cent, while 12-month term deposits average 3.37 per cent, comparison research group Canstar says.
Inflation is growing at 2-3 per cent, so anything paying less than that means you are going backwards, Canstar research analyst Adam Beu says. Bank deposits are protected by government guarantees worth $250,000 for each investor per financial institution, he says, adding that people need to be “a little more engaged” with their banking, because technology has made it simple and fast to open higher-interest savings accounts.
“Remember that inflation is going to happen whether you like it or not, so if your money is sitting in a box under the mattress, it will be losing value.” Impact Financial Coaching director Allan Ward says inertia among consumers is to blame for much of the growth of transaction account cash.
“There’s no immediate pain, nothing that causes you to stop and think ‘no, I can do better than this’, so I suspect a lot of people don’t look for better options,” he says. “If you can give up the at-call nature of it and stick it in a term deposit, you are going to get a better return.” Some people shy away from earning bank interest because it is taxed, but even when taxed savers still come out in front.
“If you are earning more and are losing 30 per cent in tax, you’re still 70 per cent better off,” Ward says. Beu says offset accounts are good for people with mortgages, as they lower the amount owing on the loan, saving money.
“Instead of earning interest and paying tax, you’re earning interest by not paying interest,” he says.