Returns from cash deposits have been tiny over the past year. Should cash still play a role for investors?

TINY? That’s generous! Cash returns are dead! D-E-A-D. They’re in negative hyperspace.

Yes, less than zero. How? If you’re earning 4 per cent interest, then take off tax (at the average rate of 34 per cent), you get 2.64 per cent. The RBA says inflation is 2.9 per cent. That’s a negative real return.

If you’re holding cash in a savings account, you are, slowly, burning money. And if you earn more than 80 grand … that sob story get worse with higher tax rates.

However, fellow investors, there’s a better way for many of you. Homebuyers can turn this negative return into a strong positive one. (Just another advantage to buying over renting.)

If you have a mortgage and an offset or redraw account, you can park your cash in one of those accounts, which saves you interest.

If your current mortgage rate is 5.2 per cent, then you effectively earn that rate. But because you’re saving it, rather than earning it, it’s a tax-free return.

So, really, you’re earning 7.9 per cent before tax (using 34 per cent again). If you earn higher tax brackets, the pre-tax return could be the equivalent of up to 10 per cent if you include the “debt levy” for higher income earners from July 1.

If interest rates move higher, the returns get better.

You need to hold some cash, or very liquid investments. A minimum of a few months worth of your salary. If you’ve got a mortgage, your offset/redraw is the only place to have it. It’s a great after-tax return.

Bruce Brammall is the principal adviser with Castellan Financial Consulting (www.castellanfinancial.com.au) and author of Debt Man Walking.