Is Your Savings Account Losing You Money? Future-Proofing Your Finances in an Era of Low Returns

A startling $118.4 billion sits in New Zealand savings accounts, yet many Kiwis are unknowingly losing purchasing power. With inflation outpacing interest rates, the traditional savings account is increasingly becoming a place where money goes to slowly disappear. But what can savers do to protect – and grow – their wealth in this challenging environment?

The Erosion of Savings: Why Traditional Accounts Fall Short

For years, the narrative around savings has been simple: put money aside, earn interest, and build financial security. However, the current economic landscape is disrupting this model. As highlighted by recent Reserve Bank data, the average interest rate on bonus-paying savings accounts is a mere 1.82%, while inflation currently sits at 3%. This means the real return – the return after accounting for inflation – is negative. Essentially, your money is buying less each year.

This isn’t a new phenomenon. Cycles of rising and falling returns have always existed. But the prolonged period of low interest rates following the Global Financial Crisis, compounded by the economic shocks of Covid-19, have created a particularly difficult environment for savers. As Kernel Wealth founder Dean Anderson points out, we’ve entered a period where simply holding cash can actively diminish your wealth.

The Apathy Problem: Why Are We Leaving Money on the Table?

Squirrel CEO David Cunningham identifies a key issue: apathy. Many individuals are unaware of the paltry interest rates they’re receiving, or simply don’t bother to shop around for better options. “Why would you have money sitting in Westpac’s standard savers account at 0.05%?” he asks. Banks capitalize on this inertia, subsidizing rate-sensitive customers with the funds of those who don’t actively manage their savings.

This lack of transparency is a systemic issue. Interest rates aren’t prominently displayed on internet banking homepages, making it difficult for consumers to quickly assess their returns. A simple change – displaying the interest rate alongside the account balance – could empower savers to make more informed decisions.

Beyond the Savings Account: Exploring Alternative Options

So, where should savers turn? The answer isn’t necessarily to abandon savings accounts altogether. They still serve a vital purpose as a buffer for emergencies, a short-term parking place for funds, and a stepping stone towards larger purchases like a home. However, relying solely on savings accounts for long-term wealth building is no longer a viable strategy.

Term Deposits: A Temporary Solution

Term deposits offer slightly better rates than standard savings accounts, but even these are struggling to keep pace with inflation. While they provide a fixed return for a set period, they lack the flexibility of savings accounts. As term deposits mature in the current low-rate environment, it’s a crucial time to reassess your financial strategy.

Cash Plus Managed Funds: A Diversified Approach

Cash Plus managed funds represent a compelling alternative. These funds invest in a diversified portfolio of cash and cash equivalents – such as bonds and short-term deposits – aiming to deliver a yield competitive with, or superior to, traditional options while maintaining liquidity. They offer a degree of diversification that can help mitigate risk.

Defensive Funds: Balancing Risk and Return

For those with a slightly higher risk tolerance, defensive funds – with a greater proportion of income-generating assets – can offer potentially higher returns. However, it’s crucial to understand the associated risks and ensure the fund aligns with your investment goals.

Diversification is Key: The Power of Asset Allocation

The most effective strategy for long-term wealth building is diversification. Instead of relying solely on cash, consider allocating a portion of your savings to a mix of asset classes – such as shares, property, and bonds – that have the potential to outpace inflation. This requires a long-term perspective and a willingness to accept some level of risk.

See our guide on Understanding Investment Risk for more information.

The Future of Savings: What to Expect

The current environment is likely to persist for some time. Central banks are grappling with the delicate balance between controlling inflation and stimulating economic growth. Interest rates may fluctuate, but a return to the high rates of the past seems unlikely in the near future.

This means savers need to become more proactive and informed. Here are some key trends to watch:

• Increased Demand for Transparency: Consumers will demand greater clarity from banks regarding interest rates and fees.
• Growth of Fintech Solutions: Fintech companies are likely to disrupt the traditional banking landscape by offering innovative savings and investment products.
• Personalized Financial Advice: The demand for personalized financial advice will increase as individuals seek guidance on navigating the complex investment landscape.
• Rise of Alternative Investments: Interest in alternative investments – such as peer-to-peer lending and crowdfunding – may grow as savers seek higher returns.

Pro Tip:

Don’t just look at the headline interest rate. Consider the impact of tax, inflation, and fees when comparing different savings and investment options. A seemingly higher rate may be less attractive after accounting for these factors.

Frequently Asked Questions

Q: How much of my savings should I keep in a savings account?
A: Keep enough in a savings account to cover 2-5 years of essential expenses for emergencies and short-term goals. The rest should be invested for long-term growth.

Q: Are Cash Plus funds a safe option?
A: Cash Plus funds are generally considered relatively safe, as they invest in low-risk cash and cash equivalents. However, their value can fluctuate slightly, so it’s important to understand the fund’s investment strategy and risk profile.

Q: What is the best way to compare savings account rates?
A: Compare the net return – the return after tax and inflation – rather than just the headline interest rate. Use online comparison tools and consider opening accounts with multiple institutions to take advantage of the best rates.

Q: Should I be worried about inflation?
A: Yes. Inflation erodes the purchasing power of your savings. If your savings aren’t earning a return that exceeds inflation, you’re effectively losing money over time.

The era of effortless savings is over. Protecting your financial future requires a proactive approach, a willingness to explore alternative options, and a long-term perspective. Don’t let your savings silently shrink – take control of your finances today.

Explore more insights on Investing for Beginners in our comprehensive guide.