(03) 9020 2905They say “money talks” and “cash is king”. Maybe in the past. But I’m here to deliver some really bad news.
Cash is on life support. It would almost be more humane to flick the switch. The prognosis isn’t good. It certainly ain’t talking much. It can barely breathe!
That’s cash as an investment. The two interest rate cuts this year (May and August) have delivered a sucker punch to the folding stuff.
Let me explain. The best online savings account interest rate available now is 4.76 per cent.
If you earn an “average” salary, you lose 34 per cent in income tax, reducing the return to 3.14 per cent. Inflation is 2.4 per cent. Subtract that and your “real return” on your savings is 0.74 per cent.
Why subtract inflation? If you had put $100 away last year, earning 4.76 per cent, it would have grown to $104.76 now. After tax, that becomes $103.14. However, what cost you $100 last year now costs you $102.40, because of inflation (2.4 per cent). Your net gain is 74 cents (or 0.74 per cent).
High-income earners, using the same math, gain just 12 cents. Seriously! Those earning $180,000-plus a year lose 46.5 per cent of their 4.76 per cent, then subtract 2.4 per cent for inflation.
Nuthin’. Not even the world’s most optimistic paramedic would call a pulse.
And if you want to see actually dead, take this. If a high-wage earner only gets 4 per cent interest, take away tax and inflation and it’s minus 0.26 per cent.
Never fear. I’m here to deliver solutions. “The king is dead! Long live the king!”
When cash returns are as feeble as Australia’s batting lineup in The Ashes … you play a different game.
Playing around
If you are a couple and you are sitting on cash, play the income tax game. If one of you earns significantly less than the other, have cash earning interest in the name of the lower-earning partner. At least that way you’ll minimise the tax on your earnings.
Don’t earn. Save!
Cash is literally a different ball game if you’ve got a mortgage with an offset or redraw account. Offsets, when attached to a mortgage, “save” money instead of “earn” money.
What’s the difference? If you have $30,000 in an savings account earning 4.76 per cent for a year, you’ll earn $1428. You have to pay tax on that, so the average worker will get to keep $942.48. Take away the impact of inflation at it’s actually $222.48.
If you have $30,000 sitting in an offset account, offsetting interest at 5.3 per cent – mortgage interest rates are higher than deposit rates – you would save $1590. But there’s no tax to pay. Now, take away inflation to get $870 and your return is, yup, nearly four times better.
Now, hyperspace for those living in the fast lane. For the high-income earner, the net return on $30,000 in a high-interest account is $43.98 versus that $870. Literally, one is 20 times the other.
That’s an argument I love having with people who argue that renting is better than buying. They’re idiots, in my humble opinion.
Open the book
The great thing about cash is it’s safe. Safe like driving a Volvo. Boring. And, it might surprise Volvo drivers, But you annoy everyone around you.
No-one should ever have everything in cash, especially now. Not even those using an offset account – at some stage, you need to invest outside your home.
Even when interest rates are high, cash returns are not for those who have any level of thrill-seeker about them. Consider diversification. Think shares. Think property.
Think longer term. Where’s your growth coming from to outstrip inflation and tax? Shares and property.
Shares – what are they again?
Sure, shares seem to have been disaster-prone for a few years now. With the ASX/200 sitting around the low-5000s, shares need to rise 30 per cent to get back to their highs.
But that’s not quite right. Australian shares pay good dividends. And if you add those back in (known as reinvesting), it’s actually right back up there near the top.
In the last 15 months, shares have had a spectacular run, returning around 25 per cent. Does that make them dangerous now? Perhaps. Perhaps not.
But they do, in the medium to long-term, provide actual growth.
Don’t die a boring death with cash. Play the game properly.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au), a licensed financial adviser and mortgage broker. bruce@debtman.com.au.