powering smart financial decisions

When saving too much is a bad thing

When saving too much is a bad thing

You may have heard the advice, “the more you save, the more you earn”, but is that necessarily true? Can putting too much into your savings account be a bad thing?

While there is merit to using a savings or term deposit account – particularly to save for larger goals such as a holiday, car or a down payment on a home, there are times when disposable income could be put to better use. So if you had a spare $5000 or $10,000 in your pocket, what should you do with it?

Do you have debt?

Deciding what to do with your extra money will depend on your circumstances, because a suitable investment option for one person may be inappropriate for someone else.

Take, for instance, savings of $10,000 invested in a 5 percent p.a. online savings account and $20,000 car loan at 12 percent p.a. paid over five years. By transferring the $10,000 onto the car loan, you’d lose the $2800 in interest from a savings account but would save $3350 in loan repayments, so you’d be $550 ahead.

Related links

…or are you debt free?

Those lucky enough to be debt free or nearing retirement will consider alternative investment options than those saddled with debt – topping up superannuation, buying shares or property, to name a few. For example, with $10,000 and a 95 percent loan a borrower could purchase a $200,000 property, or link up with someone else with $10,000 to purchase a $400,000 property (or less, assuming some funds are needed for stamp duty and fees). Supposing good capital growth and rental return on this property, profit could easily outstrip savings account yield within a few years.

But for those who prefer the security of a term deposit or the rewards associated with a bonus saver, high-interest savings accounts can be a terrific option too. Rates on these accounts range up to 6.10 percent. Be aware that to achieve these bonus rates of interest, conditions often apply – such as making regular deposits and no withdrawals, so it’s important that you always read the terms of any investment and always do your research before signing on the dotted line.

Related links

Did you find this helpful? Why not share this article?



Related articles

More articles? Read more here