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What can you do with bank savings when interest rates are low?

When talking about low-interest rates, much of the focus is on how good this is for people with debt – especially home-owners with mortgages and property investors. But what about savers who are keeping cash in the bank?

The Official Cash Rate (OCR) set by the Reserve Bank of New Zealand, has been trending down. Five years ago, the OCR was 3.50%, today it’s sitting at 0.25%. The Reserve Bank has indicated that it might go lower in 2021, to help stimulate the economy. Although banks are unlikely to have rates below 0% for their term deposits, a 1% interest rate still means that inflation can quickly erode any interest you are making.

People with cash in the bank are certainly feeling the pinch. 

There has always been a myriad of different ways to invest your money: cash, bonds, managed portfolios, property and shares. Term deposits have been, so far, another way to make a return on your money. And in terms of safe havens to protect your savings, cash has always been king.

Today we have even more options in terms of investing. More than 3 million of us are investing through KiwiSaver accounts.  Shares are also becoming popular due to a combination of people with a lot of time on their hands during the lockdowns, and the arrival of some easy-to-use investing platforms, like Sharesies.

With all these options available, what’s the best way forward? There’s not a one-size-fits-all answer. But what we can say is: a universal principle of investing is that you should never have all your eggs in the same basket.

If you are thinking about whether you should move away from term deposits and start investing, here are 5 tips to get you started.

1. Change your mindset from ‘saving’ to ‘investing’. If you have cash in the bank you may think of it as your savings. However, if you rely on those returns, and they are not achieving what you need, you need to switch your attitude from saving to investing.

Investing is more active and might require more effort on your part. But if you want your money to work hard for you, you might need to put some work in yourself. The trick is deciding what is right for you and your circumstances and the level of risk you are willing to take. The higher the reward you want, the higher the risk you have to take.

However, before investing be sure to understand your investment goals and your risk profile. What are you trying to achieve? What risk are you prepared to take? What’s your timeframe? 

2. Think long-term. You may be thinking that you can “ride it out” and wait until interest rates are up again. However, the Reserve Bank has given clear signals that the OCR might be coming down again in 2021 to stimulate the economy. How long are you prepared to wait?

As previously mentioned, low-interest rates and the prospect of further reductions mean that after tax and inflation there is likely to be little return, if any.

3. Diversify. As said before the concept is simple, don’t put all your eggs in one basket. This doesn't just mean putting your investments into different banks. Look at other options, even some that might be out of your comfort zone.

If you hold some shares, property, fixed interest and cash you are set up for whatever economic weather prevails as at least one of your investments should perform when the economy changes. 

4. Make the most of your KiwiSaver account. KiwiSaver provides a diversified portfolio that’s easy to access. By choosing your fund type, you can decide the level of risk you want to take on. The only caveat is that you have to wait until age 65 to be able to withdraw your money. However, if you have retired, you can still join or use KiwiSaver and have your money placed in a managed diversified portfolio.

5. Get advice. If you are new to investing, it’s good to have a Financial Adviser working alongside you to help you understand your financial goals, your appetite for risk and help set you up so you can achieve those goals.

A recent survey from the Financial Services Council found that New Zealanders that get professional advice receive 4% better investment returns and have approximately 52% more in their Kiwisaver. To put this 4% into real terms; if a 25-year-old were to take financial advice and saved $2500 per year, they would be $1.5 million better off at 55 than if they didn’t take advice.

Katrina Shanks, Chief Executive of Financial Advice New Zealand, says “In the same way you wouldn’t hire a personal trainer without knowing if you wanted to be a sprinter or a weightlifter, you shouldn’t move until you can identify the outcome you want. The bottom line is whatever you decided to invest in, you should spend some time understanding all the options and the risks associated with them.

Do your due diligence based on your level of risk. If you’re still unsure, remember diversification is key and spread your risk. Easier still, seek some independent advice from a financial adviser”.




 

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