Is your money safer in your wallet or in the bank?

Is your money safer in your wallet or in the bank?

Some Australians are understood to be taking money management into their own hands… literally. But is stockpiling cash really safer or better than keeping your money in the bank?

In a speech to the House of Representatives Standing Committee on Economics last week, Reserve Bank of Australia (RBA) governor Dr Philip Lowe mentioned that as well as helping the federal government manage its economic support packages, the RBA has been working hard to support the “increased demand for banknotes”:

“While COVID-19 has accelerated the shift to electronic payments, there has, paradoxically, also been record demand for banknotes. Some people seem to be wanting to keep some extra money at home. The result has been that the stock of banknotes on issue has increased from $83 billion in February to $94 billion today. We have met this extra demand despite our main storage vault being located in one of the coronavirus hotspots in Melbourne.”

If you feel more comfortable keeping a ready supply of the folding stuff close at hand, or if you're concerned about the safety of the money you put in the bank, that’s fine. But when it comes to hoarding cash under the mattress like a slumbering dragon, there are a few potential risks to consider:

Your money could be lost, stolen or destroyed 

One of the main risks of investing in physical assets, such as a briefcase full of fifties, is that your wealth is physically held in the banknotes themselves. If you can’t access your banknotes (such as if you leave them at home while you’re out, or you bury them under a big X), you can’t easily spend them.

Furthermore, if your cash is stolen (whether in a mugging, a break-in, or an elaborate scheme masterminded by Hans Gruber), or destroyed (a very real risk if you live in a region of Australia that’s vulnerable to bushfires or floods), your money is gone, and may be impossible to recover.

Cash transactions could be a virus risk

If you’re taking cash out with the goal of spending it, keep in mind that this could put yourself and others at risk of spreading and/or contracting the coronavirus.

Coins and banknotes can serve as disease vectors. Considering that it’s possible to spread COVID-19 via respiratory droplets from coughs and sneezes, one cash transaction with someone who hasn’t washed their hands could mean risking future health problems.

Money under the mattress isn’t doing anything for you

Money locked in a safe or stashed under the floorboards isn’t going to grow anything other than a fine coating of dust. This can lead to problems when inflation affects the buying power of your money – for example, if ten years ago you put enough cash to buy a movie ticket in your piggy bank, today that pile of coins may only let you buy a small popcorn.

Keeping your money in the bank makes it possible to earn interest on your savings, and grow your wealth over time. Admittedly, interest rates on savings accounts and term deposits aren’t at their highest point at the time of writing. It may be worth comparing your options and looking for a higher interest term deposit, or a savings account with a higher bonus rate and terms and conditions that are easy for you to fulfil, so you can earn enough interest to help offset inflation.

What if savings account interest rates go negative?

Following consecutive cuts to Australia’s cash rate last year, there has been speculation that the RBA could drop the cash rate down to negative figures – a situation that could theoretically lead to banks actually charging interest on savings accounts, rather than letting savers earn interest on their wealth.

Although the pandemic and recession has put pressure on Australia’s economy, the RBA has stated that it is “extraordinarily unlikely” that it would send rates negative. 

Money in the bank is guaranteed by the government

Are you taking cash out because you’re worried about your bank going out of business thanks to the recession? Depending on your situation, you may not need to worry, as Australia’s federal government guarantees money deposited with Authorised Deposit-taking Institutions (ADIs).

Under the Financial Claims Scheme (FCS), the government guarantees up to $250,000 in deposits, per account holder, per ADI. That means if your bank went out of business, you’d be able to claim your money back from the government, up to $250,000.

Even if you have more than $250k saved in your account, there are still options to help protect your wealth in case the worst should happen. If your savings are in a joint account (such as an account you hold with your spouse), each account holder can claim up to $250K under the FCS. You could also look into splitting your money between different ADIs. Check with a financial adviser to learn more about what other options may be available for you.

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Learn more about savings accounts

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

What are the requirements of an ING Bank locked savings account?

An ING bank locked savings account - also called a term deposit - offers you interest in exchange for holding your money for a period of time.

The terms offered include as little as 90 days or as long as two years. Generally, the longer you lock your money away, the higher the rate of interest. 

The minimum deposit amount for an ING locked savings account is $10,000. 

To be eligible to apply, you must: 

  • Be an Australian resident for tax purposes
  • Be aged 13 years or older
  • Hold the account for personal use (ING offers business term deposits as a separate product).