Popping the savings bubble

20th of September 2011 | by RateCity Staff

Australians have weathered the global financial crisis, rising interest rates, and staggering debts over the past few years and despite this, frugal savers have come out of winter with more savings than ever. For those wondering how you can best put your cash to work for the new season, here’s a handy guide that your wallet would love.

Firstly, it is important to understand the difference between ‘extra savings’ and the savings that will pull you through a rainy day.  For example, if your savings account balance is less than two months of your salary, you may want to consider holding on to it in case of emergencies such as job loss, accidents, and large debt payments.

Extra savings

So what about the rest? A good ranking system for what you should do with your spare savings can be made by looking at your loans, and the savings accounts in the market.

For example, let’s say that you have $10,000 lying around in an everyday savings account, along with $4,000 in credit card debt and a $200,000 mortgage.

If your savings account earns 4 percent, then you can expect an easy $400 every year in profit. But if your credit card attracts 15 percent interest, paying off all the debt and leaving the rest in savings will save you $600 in interest and earn you $240 in savings.

Now, let’s consider using the lump sum to reduce your home loan. At a 7 percent rate and with 15 years left on the loan, $10,000 would wipe off around $17,300 from the total interest of your loan over the years. An impressive amount, but this is only equivalent to investing your $10,000 into a 3.72 percent savings account.

Savings options

In the above example, wiping your credit debt and investing the rest into your savings would net you the best gain, but these choices can become trickier as your mortgage and savings account rates fluctuate.

Online savings accounts and ‘progress’ or ‘incentive’ accounts (which require steady, regular deposits) are equipped with rates above 6 percent these days. The downside is that you will likely lose the premium rates by withdrawing your cash, but they are nevertheless powerful savings allies.

Think about all the spare change jangling in your account, and compare high interest savings accounts online with all your debt commitments to maximise your savings in the new spring.