Three tips to help your money work harder for you in a recession

With the country already in a recession, Australians are bracing themselves for the most significant federal budget deficit since World War II.

While the government is spending billions of dollars to provide stimulus support in these difficult times, Australians are concerned about whether their financial situation will weather the storm.

As uncertainty rises and growing unemployment potentially on the horizon, RateCity has put together four tips to help put your hard-earned money to better use.

1. Top up your super

If COVID-19 hasn’t taken a toll on your personal finances, and you happen to have some spare cash from staying at home more, it could be worth considering making extra contributions to your super. This may help boost your retirement money, as compound interest and potential investment returns work hand-in-hand to build your super over time. 

There are a few ways to do this, including:

  • Pre-tax salary sacrificing – Known also as concessional contributions, this generally comes from your pre-tax income. You may need to request your employer to arrange this.
  • After-tax contributions – Non-concessional contributions come out of your take-home pay, as you would’ve already been taxed on this money. This type of top-up can be one-off or regular.
  • Spouse contributions – If your spouse’s work has been affected by COVID-19, or if they earn a lower or no income, it’s possible to split your employer contributions with your spouse. 

To help you estimate the impact of additional contributions on your super, consider using MoneySmart’s superannuation calculator

2. Focus on mortgage repayments 

While hundreds of thousands of mortgage holders have put repayments on hold, if you haven’t been financially hit by the pandemic, you could consider making extra mortgage repayments. Your home loan is likely to be the biggest personal debt you hold, so it may make sense for some households to try and minimise this. 

Making extra repayments may help you pay down your home loan sooner. Let’s say a mortgage holder on a $300,000 home loan with a 3 per cent interest rate over 30 years pays an extra $100 per month. Doing this may potentially slash their loan term by three years and four months and save them more than $19,000 in interest costs.

Keep in mind that not every lender allows borrowers to make extra mortgage repayments, and some may charge a fee to do so. It’s best to consult your lender for specific terms and conditions.

3. Set up a rainy-day fund

Perhaps your priority now is to keep your close and accessible in case something unexpected comes up. If this is you, it could be worth setting up an emergency fund to safeguard your financial future. Building a kitty could help if you or your partner loses your job or if your employer stands you down due to the economic downturn. It could also come handy if a hefty medical bill comes your way. 

As a starting point, it may be a good idea to ensure you can access $2,000 in case of an emergency, though everyone’s spending patterns and financial situations will differ. You may want to put together a budget to help you understand how much you might need for an emergency fund.

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Learn more about savings accounts

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 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. 

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.

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.

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 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.

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

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.

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 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.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

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.

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.

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.