Interest rates on savings accounts were over 5% p.a. in 2011… only 10 years ago. Today, you would be lucky to receive more than 0.5% p.a.! That means your savings won’t even keep pace with inflation, let alone provide you with any investment return.
As such, many investors are wondering what to do with their cash savings, other than depositing the money with a bank.
This blog discusses some alternatives to bank deposits. However, please do not make any financial decisions solely on the information contained here. It is general information only and does not consider your unique circumstances. It important that you receive personalised and independent financial advice before investing any monies.
I have listed each investment option in order of risk (the lowest risk options first).
Option 1: Deposit monies in an offset linked to a mortgage
If you have a variable rate mortgage, typically the best use of cash savings is to deposit the monies in a linked
offset account. Given home loan interest rates range between 2% and 3.5% (depending on whether it’s a home or investment loan), this will save (or make) you a lot more interest compared to depositing your money in a savings account. Most importantly, it’s a risk-free return. That is, your return will always be equal to the mortgage’s interest rate – there is no risk.
Of course, you should offset non-tax-deductible (home loan) debt first. Once your home loan is fully offset/repaid, you should then offset investment debt.
Sometimes people worry that offsetting an investment loan will reduce their negative gearing tax benefits. However, firstly, negative gearing benefits are relatively small at current interest rates – investors aren’t saving huge amounts of tax anyway. Secondly, if you invest your cash savings elsewhere, you will have to pay tax on any returns (unless one spouse has a low/no income). Therefore, as both options have tax consequences, they net each-other out, and are therefore not relevant.
Option 2: Invest in government and treasury bonds
A bond is a loan instrument where the investor is the lender, and the borrower is the issuer. The federal and state governments issue bonds to raise debt. You can invest in these bonds i.e. in essence you lend money to the government.
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IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
