(03) 9020 2905Benny and Bjorn were right – money is funny. The ABBA boys penned their dumb ditty and that, in turn, made them a money mountain.
For them, the “must be funny” money turned into a neverending cash generator that still bursts their bank accounts today. Hilarious.
Reality check. Neither you nor I are going to write an intergalactic hit song that will deliver us a magic money pudding like this.
We’ll have to work a little harder. We’ll probably have to work a little bit longer. And we’ll certainly have to be a little smarter than … “In my dreams I have a plan, if I got me a wealthy man”.
This might sound a little obvious, even stupid, but when it comes to money, it all starts with cash. That base level financial commodity that comes well before property, shares or bonds.
Cash greases wheels. Makes you show up for work. Pays the mortgage/rent. Supplies the kids with junk. Buys the groceries. Keeps updated 80s tunes in the car stereo … er, CD player.
It’s the same for the businesses you hand your money to. They need to pay staff, rent, office supplies, raw materials and to transport goods to or from somewhere. Some beer I occasionally drink travels from Mexico and Japan.
If cash runs short, or you owe a lot of it to the mafia or, potentially, the tax office (welcome home, Hoges!), sometimes desperate measures are required.
You want to know who’s short of cash at the moment? Who’s desperate for it? Who’s doing silly things to get their hands on yours?
You might not believe this, but … banks.
Lenders are gagging for it. They’re struggling to get enough. Their usual sources have dried up. And they’re willing to pay hefty prices, as in interest, in order to get their hands on more of it.
Until the GFC hit, banks went offshore for their excess cash requirements. But the rest of the world is broke. So lenders are turning, cap-in-hand, to Australians.
If you’ve got spare cash now – and new figures suggest Australians are holding more cash than usual because they’re not enthused by the stock market – then you’re sitting in the box seat.
And that’s led to an interesting bonanza. Actually, that should read a bonanza of interest.
InfoChoice recently reported there are 17 accounts paying more than 6 per cent interest.
The wandering headline that is Sir Richard Branson is out front. Virgin is paying 6.75 per cent! That’s higher than I’m paying on my home loan. The Reserve Bank’s cash rate is only 4.5 per cent.
It’s got to be too good to last. And it is. Most of those high rates are for a short period, before it reverts to a lower rate.
They hope that you’ll bring your cash to them, laugh at how much interest you’re earning, then forget to take your money and walk somewhere else when they drop the rate on you.
Not long ago, the financial media warned about the same thing in reverse with home loans, called “honeymoon rates”. This was where banks suckered first-home buyers in with cut-price rates and then after six months or so, pushed them onto a higher rate.
This is the same trick. If you go with an account who drops your rate four months later, you’ve got to change accounts to make your cash work harder.
High interest is great, but there’s a downside. For a start, “earning” interest is rarely, if ever, as good as “saving” interest. If you earn 6.75 per cent in interest, you’ll lose up to 46.5 per cent of it to the tax man.
A far better spot for cash is an offset or redraw account, if you have a home loan. You’ll save somewhere between 6.6 and 7.5 per cent. But it’s worth nearly twice as much because you won’t pay tax on it. It’s a guaranteed, tax-free, return.
Cash as an investment isn’t sexy. Not like Allison Dine in an early series of “Underbelly” rolling around on a bed of old Australian paper $20 notes. Gen Xers should, over time, have far more of their money invested in shares and property than cash.
But given everyone has to hold cash, you might as well as get a decent return on it.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au .