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Stretching your savings dollar when rates are low


Laine Gordon

By Laine Gordon

4 min read

While home owners around Australia might be rejoicing, the Reserve Bank of Australia's (RBA) latest cash rate decision will leave savers with not much to celebrate. The RBA board decided on April 7 to leave the cash rate unchanged at the record-low rate of 2.25 percent, which means another month of ultra low interest rates for savings accounts. 

In fact, it seems avid savers won't have higher rates to look forward to any time soon — in his statement, RBA governor Glenn Stevens hinted that the cash rate is likely to fall even lower in the future.

All of this might leave Australians scratching their heads and wondering what to do with their savings. In addition to comparing savings accounts and finding one with the most advantageous rate, there are alternatives that you can take to make your savings dollar go that much further.

Slash your debts

At first, you might not think of paying down debt as saving money. But getting yourself out of the red and back in black is like an inverted form of saving — you're preventing yourself from falling deeper into the debt hole by accruing lots of interest.

A period of low interest rates is an ideal time to get rid of as much of your 'bad debt' as possible — consumption debt, like credit card balances, or the total you have left on a car or personal loan. According to the Australian Bureau of Statistics, the average debt for both vehicle loans and other consumption loans in 2011-12 was $19,500 each  — hardly a number to scoff at. The income you would have put toward your savings or making interest repayments can instead go toward whittling this down.

Zero in on your home loan

Speaking of debt, a low interest rate environment is also a good time to service your 'good debt'. In this case, we're talking about the largest bit of 'good debt' you likely have — a mortgage. Rather than squirrelling money away into a savings account, an alternative destination for your money could be a 100 percent offset account on your home loan. The more of your hard-earned savings you put into here, the smaller your home loan balance, and the less interest you have to pay. 

In essence, you're investing in your home, with the knowledge that as you pay it off over time the equity in the property is steadily growing. This equity can eventually be used to serve the same purpose as a savings account, including bankrolling your retirement or even being used to fund certain large purchases, with the right loan attached. Plus, you can always withdraw the money in the offset account in emergencies.

Shop around for some high-interest alternatives

There are a variety of high interest savings accounts out there that can prove useful when rates are low. Most people think of term deposits, but there are a number of alternatives that can help your savings really stretch. 

In March 2014, Roy Morgan reported that the number of Australians with such accounts climbed by 1.5 million people over the preceding five years. That's a 44 percent increase. One of these options that has proven increasingly popular is the bonus interest or reward account, which provides a bonus rate of interest on top of the normal rate if certain conditions are met. This could be anything from refraining from withdrawing to depositing a certain amount each month.  

Become a super saver

For a lot of people, their savings will go toward funding their lifestyle once retirement rolls around. If interest rates are low, it may therefore also be a good idea to simply stash more money in your super — your savings will ultimately end up in the same place anyway, after all.

Consider entering into a salary sacrificing arrangement with your employer, whereby the portion of your future pay cheque that would have been your savings goes instead to your superannuation account. You'll not only have more in the kitty when you decide to hang up your hat, you'll also be paying less tax. And if you've picked a growth investment option for your super, you could even see these funds grow at a significantly faster pace.

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