Few bank savings accounts beat inflation

Putting your money in a savings account might mean throwing returns away.
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Putting your money in a savings account might mean throwing returns away.

Bad news if you've got your hard-earned cash stashed in a bank savings account – you are probably paying for the privilege.

A survey of bank savings account interest rates shows the vast majority pay less than the rate of inflation.  That means that money left there is worth less each year.

Inflation hit 1.3 per cent in January but the Reserve Bank is working to get it closer to 2 per cent.

By contrast, banks offer just 0.1 per cent or 0.2 per cent a year in interest in most of their basic access-any-time savings accounts. Any interest you do earn is also taxed.

READ MORE: Is it a good idea to break your fixed-term loan to take a better deal?

Financial adviser Hannah McQueen said anyone with money in the bank needed to know that it was not a money-earner and that they would go backwards, in real terms. All cash in the bank could offer was peace of mind.

 "It's the safest form of investment but it means a slight decrease in capital," she said.

"It's not a viable investment option for a lot of people. It's just where you hold your money."

She said when there was, in effect, no return on a savings account, it made it hard to explain the concept of saving to children.

"My eight-year-old says what's the point of doing it?"

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She said people with money sitting around would be better to consider their appetite and tolerance for risk and find an investment option to match. 

That might mean using leverage to invest in a business while bank funding was cheap, she said, or buying bonds or shares.

Another adviser, Liz Koh, said the situation was likely to get worse as inflation tracked higher. "You've got to be careful how much money you have in those type of accounts," she said.

She said term deposits would keep ahead of inflation, but not by a lot. If you are willing to lock your money up for at least a year, you can earn about 3.5 per cent in a term deposit. 

"It's always good to have some of you money on hand but it's not there for investment purposes, it's there for emergency purposes," Koh said.

"There's a trade-off there if you want to have the money on hand you're not going to earn anything like a return on investment on it - because it's not an investment.  Just have on hand what you genuinely need as an emergency fund and any money beyond that needs to be invested with the idea of getting a return that's higher than inflation and tax.:"

It is possible to get up to 2.4 per cent from a bank savings account, but only if you do not withdraw money and commit to making at least monthly deposits.

 

 - Stuff

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