The average interest rate on bonus-paying savings accounts was 1.82% in November, while other types offered rates closer to 1%. In comparison, inflation, as measured by the consumer price index, has been at 3%.
Dean Anderson, founder of Kernel Wealth, highlighted the fluctuating returns on savings accounts over time. He mentioned periods post the Global Financial Crisis when interest rates were low, but inflation was also modest, resulting in small positive real returns for savers. However, the situation shifted with Covid, leading to near-zero to negative real returns for many savers.
While holding cash is essential for emergencies or short-term goals, it may not be the best long-term wealth-building solution. Despite this, data from the Reserve Bank shows a significant increase in savings and transaction account balances over the past year.
David Cunningham, CEO of Squirrel, attributed this increase to customer inertia, with many individuals leaving substantial amounts of money in low-interest accounts out of habit. He emphasized the importance of comparing returns after tax, inflation, and fees to make informed financial decisions.
To address the issue of low savings account rates, Anderson suggested diversifying investments and considering alternatives like Cash Plus managed funds or defensive funds. Liz Koh, founder of Enrich Retirement, advised against relying solely on bank deposits for income, recommending investing in other asset classes for growth and income.
Ultimately, the key takeaway is to reassess savings strategies and consider alternative investment options to combat the challenges posed by low savings account rates.
