Source: Radio New Zealand
Savings account rates generally aren’t offering enough interest to keep up with inflation. But what are savers’ options if they don’t want to see their money going backwards?
Reserve Bank data shows that the average interest rate paid by bonus-paying savings account, such as those that reward someone when they make regular deposits or don’t withdraw, was 1.82 percent in November.
Other types of savings accounts had much lower rates, nearer one percent.
Inflation as measured by the consumer price index has been running at three percent.
Dean Anderson, founder of Kernel Wealth, said there had been clear cycles over time when the return on savings accounts after inflation had moved between positive and negative.
“In the years following the Global Financial Crisis, interest rates fell but inflation was also relatively low, so real returns on cash were small but often still slightly positive.
“From around 2013-2019 we had a ‘low rate, low inflation’ environment – the so called new normal – which typically meant modest, but not exciting, real returns for savers.
“Covid then changed the picture. Policy rates were cut to record lows, and more recently raised sharply to combat a spike in inflation. The result is that many savers have been earning a zero to negative real return: after inflation, and especially after tax on interest, the purchasing power of their savings has often been going backwards.
“That doesn’t mean holding cash is always a bad idea. Cash and on call savings still play an important role – for example, as a buffer for emergencies, as a short-term parking place for funds, or as a deposit for a home. But it does mean cash is usually not a great sole solution for long-term wealth building.”
Reserve Bank data also shows there is $118.4 billion in savings accounts, up from $110.7 billion a year ago.
There has also been growth in the amount of money in transaction accounts, which often pay no interest at all, up from $123.4 billion to $139.9 billion.
Term deposit balances have grown from $227.4 billion to $228.6 billion over the same period.
David Cunningham, chief executive at Squirrel, said it could be due to customer inertia.
“When interest rates are high, a savings account is as good a place to have your money as any, but when interest rates fall they become really very unattractive relative to term deposits, for example.
“Why would you have money sitting in Westpac’s standard savers account, which I think is called Simple Saver or something like that, at 0.05 percent. You know, five basis points. I mean, it’s as good as zero, right?
“It really is apathy. Why would you have money sitting in a transaction account? Lots of people will probably have a thousand or two, just free cash flow but there are people with tens of thousands of dollars sitting in transaction accounts.”
He said it made the banks money.
“It’s the classic ‘pay the rate-sensitive customer and effectively subsidise it from the non-rate sensitive customer or the customer displaying inertia’. That’s one of the secrets of banking.”
He said it was sometimes the case that people did not even realise the rates they were getting.
It was not displayed clearly on internet banking homepages.
“What would the answer be? You get it on your home screen where it displays the balance… if it showed the interest rate, people would wake up, wouldn’t they? “
So what can you do about it?
Anderson said there were a few things people could think about to boost their returns,
If they needed their money in the next year or two it should be in cash or short-term deposits even if they were getting a lower return.
“Longer term goals may benefit from a more diversified mix of assets that have a better chance of outpacing inflation.
“As term deposits mature into a lower rate environment, it’s a natural time to reassess whether all of your savings should stay in cash, or whether some could be allocated to other income generating or growth investments.”
He said people comparing returns should look at them after tax, inflation and fees rather than the headline rate.
“Cash Plus managed funds can be a compelling alternative to traditional term deposits or flexible savings accounts. Structured as a diversified fund, they invest in cash and cash equivalents – like bonds and short-term deposits. While their value can fluctuate slightly, they typically aim to provide a yield that is competitive with, or superior to, traditional savings and term deposits, while still being liquid.”
He said a defensive fund could also be an option. These have a higher proportion of income-generating assets.
Liz Koh, founder of Enrich Retirement, said people were missing the point if they were worrying about savings account interest rates.
“The bank is a place where you keep money safely until you want to spend it or invest it elsewhere. You should not rely on bank deposits for income. Bank deposits should be kept to the minimum of what you need in cash for the next two to five years and the rest should be invested in other asset classes or diversified funds to provide both income and growth. When interest rates are low you don’t want to be paying fees on investment products that invest primarily in cash or cash equivalents as you could well get a negative return after fees.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand
