Based on current data, household bank deposits, including; savings, transaction accounts, term deposits, and offset balances are sitting at a record high level of $1.46 trillion dollars.
But what most people don’t realise is that any money you have sitting in cash is being eroded by inflation and tax.
Because the interest you earn on a savings account is taxable at marginal tax rates of up to 47 per cent, and then on top the cost of everything is increasing each year with inflation, any money you have in cash is breaking even at best, and probably going backwards.
If you’re earning good money and stockpiling cash, the uncomfortable truth is that you’re losing ground - and over time this adds up in a big way.
Cash can’t keep up
Just to be clear, cash does have an important role to play.
It’s great for emergencies, short term goals, and giving you peace of mind.
But anything beyond that, and it becomes a drag. There are three key reasons why.
Firstly, inflation eats into your purchasing power.
If inflation is running at the RBA’s target of 3 per cent, $100,000 in the bank will effectively be worth only $97,000 in a year’s time.
Cash has an important role to play but there can be hidden costs. (Source: AAP/Getty)
Further, returns on cash are taxed.
Even if you’re earning 4.5 per cent interest, if you’re paying 37 per cent tax, your after tax return is closer to 2.8 per cent - which is less than the inflation rate over the last few years.
And finally but maybe most importantly, you miss out on compounding.
Cash savings don’t grow in a meaningful way over time, and definitely don’t grow in the way investments do.
The end result is that while having a good savings balance feels safe on the surface, this is silently costing you money every single month.
There’s a smarter alternative to hoarding cash
The answer here isn’t just to ‘dump all of your money into the sharemarket’ which could come with more risk than you need.
Instead, what you need is a system - a smarter way to use your cash to build flexibility and momentum, without risking your financial progress.
There are four key things you should be thinking about to make sure you’re making the most of the money you have today.
Keep the right amount of cash
You most likely should be holding some of your money in cash — just not all of it.
As a general rule of thumb, you should have a maximum of 3-6 months of your core spending in a high interest savings account for emergencies.
This gives you peace of mind and will protect you from the unexpected.
In addition, if you’re planning a large expense, i.e. house deposit, school fees, or a holiday, cash is probably the right place for that money.
But anything beyond this means you’re overcapitalising in an underperforming asset, and probably costing yourself a bunch of money.
Use offset accounts to kill bad debt faster
If you’ve got a home loan, one of the best places for your savings is to put it to work against your debt.
Instead of sitting cash in a savings account, parting it in an offset account will generally see you further ahead.
An offset account reduces the amount of interest you’re charged on your debt.
So if your mortgage is $650,000, and you’ve got $50,000 in your offset, it means you’re only paying interest on $600,000.
That’s a risk free and tax free return on your money at your current mortgage interest rate, which beats most savings accounts hands down.
If you’ve got a loan and you’re still saving into a regular savings account, think about using an offset account to get your money working harder for you.
Automate investments into growth assets
Once your buffer and debt strategy are sorted, it’s time to get your cash growing.
You can start by automating monthly investments into growth assets like ETFs or shares, or even directing the money towards an investment property.
Doing this on a consistent schedule allows you to remove emotion and takes advantage of market cycles.
This is where the long term compounding magic happens — and where your money starts actually building your wealth rather than just sitting still.
BREAK IT DOWN: Investing just $1,000 monthly over a 20 year period would see your money grow to be worth around $739,964 based only on the long term Australian sharemarket return of 9.8 per cent.
This compares to directing the same $1,000 monthly to a savings account at 4 per cent — where the money would grow to be worth only $366,775.
That’s a difference of $373,189 on exactly the same money and shows the power of getting quality growth assets behind you.
Thankfully today technology is making this easier than ever before.
Consider finding a low cost investment platform, and scheduling a fixed monthly transfer from your bank account directly into your investment accounts — and watch your money grow faster.
The wrap
Cash has its place — it gives you flexibility, stability, and peace of mind.
But if most of your money is parked in cash, it’s limiting your financial potential.
With inflation not going away and the tax coming in on top, too much cash means slow progress.
Smarter strategies, like minimising your savings, offset buffering, and automatic investing, all allow you to protect what matters while you grow your money.
Cash has a role, but it’s not the hero in your financial plan.
Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben’s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon | Audiobook.
If you want some help with your money and investing, you can book a call with Pivot Wealth here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
