Australians have been urged to reconsider their assumptions around their savings accounts amid new figures highlighting the cost of inflation.
The Reserve Bank of Australia cut rates to a record low 0.10 per cent in November 2020, and while that’s been good news for home owners, it’s kept savings rates at record lows.
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And according to Stockspot head of client care and advice Sarah King, the long term ramifications of these rates can’t be understated.
“Essentially, low interest rates mean that Australians simply stashing cash in a high interest savings account are likely to see the value of their hard-earned money fall in comparison to the rising cost of goods and services,” King told Yahoo Finance.
“This means that simply keeping your savings in a savings account and not researching strategies to grow your wealth could be the riskiest financial move of all.”
She said that interest rates aren’t expected to increase in a significant way for a long time, and so Australians with all of their money in savings risk having a sizeable chunk of their interest eaten up by inflation.
“As we all know, things cost more year on year, and when interest rates were high, it made sense to leave your money in a high interest savings account. It’d just sit there and grow without you having to do anything,” she said.
“Over time, interest rates have been dropping, and with COVID-19 and economic stimulus packages, the rates have plunged even further. I don’t see them coming back up anytime soon, so a long-term investing strategy is really the only other option to grow your money in a sensible, steady way.
What does that look like for my money?
A person who put $1,000 in a high interest rate bank account in 2001 would have $1,930 by 2020.
However, if that same person were to purchase a shopping trolley of goods worth $1,000 in 2001, by 2020, that same basket of goods would cost $1,624. That’s based on an average annual inflation rate of 2.5 per cent.
That means that even though the saver has essentially doubled their savings, the cost of living has eroded most of the benefit.
Someone who invested $1,000 in the Australian All Ordinaries in 2001 would have increased their money to $4,907 by 2020.
And if a person had put $1,000 in a high interest savings account, they would have $1,128 by 2020.
If that same person had purchased a $1,000 shopping trolley of goods in 2016, by 2020 that shopping trolley would cost $1,078 in 2020, based on an average inflation rate of 1.5 per cent.
A $1,000 investment in the stock market in 2016 would now be worth $1,557.
King said it’s critical that Australia’s savers are aware of the impact inflation is having on their savings and consider whether some of their money could be invested instead.
“It’s so important for people to understand that part of saving your money for a rainy day is making sure that money is keeping up with the rising costs of goods and services,” King said.
The Reserve Bank of Australia will announce the official cash rate for June on Tuesday 1 June.