Jack Han investigates the myths about stashing your cash.
October 14, 2009
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?
The current household saving ratio is 4 percent, which means that on an average $48,000 salary, Australians are saving $1,920 a year. If we compare this to big savings goals such as paying a $20,000 deposit on a first home, you could be saving for 10 years.
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 paying debt, which normally attracts higher interest rates. For example, Evelyn has $10,000 in a 5 percent p.a. online savings account, and $20,000 debt on a 12 percent p.a. car loan paid over five years. By transferring her $10,000 savings into her car loan, Evelyn will lose $2,833 in interest from her savings account but she would have saved $3,350 in debt repayments, earning her $517.
But what if you’re without debt and simply saving for saving’s sake? 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 today’s best online savings accounts for rates as high as 5.11 percent p.a.
If you think you’re saving too much, consider ways to make 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.