When saving money actually costs you more

December 9, 2010

You will often hear the advice, “the more you save, the more you earn”, but is that necessarily true? Can putting too much into your savings account be bad for you, or is it just a myth that retailers want you to believe?

According to the latest ING Direct Financial Wellbeing Index, the average household income is $71,140 with an average of $8912 in savings. If we compare this to big savings goals such a $20,000 deposit for your first home (which is 5 percent of a $400,000 mortgage), it could take many years to reach.

Many experts argue that saving can be profit foregone from opportunities such as participating in a recovering stock market, or paying down debt. While it’s hard to predict your returns from stock investments, fund managers will often show the long-term gains from stocks to be above interest rates on savings accounts.

A guaranteed method of gaining profit from your savings is by paying off your debts that attract higher interest rates. For example, if you had $10,000 in an online savings account earning 5 percent per annum, and a car loan debt balance of $20,000 at 12 percent per annum over five years. If you transferred your $10,000 in savings and put it towards the car loan, you will lose about $2800 in interest from the savings account but would save $3350 in debt repayments, earning you $450.

But what if you’re debt-free and simply saving for a rainy day? This is the case for many retired Australians, who have finished paying off their mortgages and other debts.

There is no “rule of thumb” for how much everyone should save. However, if you’re debt-free and want a savings option that guarantees you the highest returns on the market, you can compare online savings accounts for rates as high as 6.51 percent by UBank‘s USaver(current as at December 9, 2010).

Term deposits are also a great option for those that have a large chunk of cash sitting around. For instance, you could earn 7.30 percent interest with a five-year term from Bank Of Cyprus (as at December 9). With a $50,000 deposit, that could earn you a smooth $21,000 after five years (not compounding).

If you think you’re saving too much, consider ways to make a profit from spending, such as paying down debt or investing. But remember that saving should always be tailored to your goals, so make sure that your savings account is always working to please your needs, and not the other way around.

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