Savings don’t belong in the bank

When you’re looking to save money, a simple bank account isn’t the best option, says Sally Patten.

Cash has the upside of being safe because you are guaranteed to get your money back, right?

That is technically the case for deposits of less than $250,000, but don't be fooled by the safety bit. While it is sound strategy to keep money in the bank to fund short-term expenses, leaving money lying around in a deposit account for a long time is not a great idea. Indeed it will end up costing you.

"In real terms you will be going backwards," Sam Henderson, of financial advice boutique Henderson Maxwell, warns.

It might sound counter-intuitive, but he's right. The best rate of interest you can earn on a term deposit in mid 2016 is about 3 per cent. It is a paltry sum – and it is even less once the tax office grabs its share. Unlike other investments, such as shares and property, all the benefits derived from putting money in the bank are taxed at the marginal rate.

For people earning between $37,000 and $80,000 the marginal tax rate is 32.5 per cent, rising to 37 per cent for earnings between $80,000 and $180,000.

If you are on the lower rate that means the return you will actually receive on a bank deposit will be closer to 1.7 per cent. If you are in the higher tax bracket you will receive a net rate of closer to 1.6 per cent.


The problem is that both of these figures are near the "core" rate of inflation, so if you keep your money in the bank, over time your purchasing power will, at best, only keep pace as the price of goods and services rises. In other words, your savings will be eaten by inflation.

Hence, Henderson's warning that your savings will be going backwards.

Kate McCallum, of Multiforte Financial Services, agrees: "There are better things to do than put money in the bank," she says.

There is a caveat, however. Henderson argues that if you need the money in the next one-to-three years, the bank is not actually a bad place for it. If you invest the money elsewhere, say in shares, you might need to sell the investment at the wrong time and you might not get all your capital back.

Henderson likes to talk about a "kick-start" account. This is a bank account that you build up until it has anywhere between $5000 and $20,000. If you don't need that money for at least three years, it is a good idea to put it somewhere else, where it will earn a better return. This could be property or the sharemarket, or for people approaching retirement, it could mean putting extra money into superannuation.

Working the land

Gail Missen puts her savings into her farm rather than the bank because it pays off in tangible ways.

Her 20-hectare property on the mid-north coast of NSW is large enough to produce most of the household's food but small enough to be manageable with a full-time job in town.

"In the past I've saved extra into super and had an investment property that did quite well but now I'm ploughing everything back into the farm," the 58-year-old community care worker says.

"I want to be as self-sufficient as possible so I'm putting together stuff for the future. It's a shitty life on the pension. If you've got your car and mortgage paid off and can produce your own food and most of your power and water, then you're taken care of."

Missen has beef cattle and pigs for money and meat, goats to keep the property clean, hens, beehives, an orchard for a wide variety of fruit and an extensive vegetable garden. The recent additions of solar panels and a tractor and slasher are part of her plan for a sustainable future.

She's been on the property since she was 25 when, with her former husband and with three tiny children underfoot, she built the house. "We did most of the labour ourselves and were in it within six months," Missen says.

Now with the help of her five grown children, who include a carpenter and two landscape gardeners, she wants to make the farm as productive as possible. "I want it for the family – never to be divided, but a place they can always come to, whether as a holiday house or to live in and chill out for a while."

Case study by Natasha Hughes


July 2016