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HomemibusinessPut Your Money to Work

Put Your Money to Work

You work hard for your money, but how hard does your cash work for you?

Over the past two years, global financial markets have been turbulent as credit markets were being squeezed and funding became harder to come by. There was little confidence in overseas money markets, and the Reserve Bank of Australia spent 2009 doing what they could to keep our markets liquid and avoid a greater financial disaster.

With the economy improving and interest rates steadily rising, there has been a surge in the popularity of low-risk cash investment products. This has been accentuated by financial institutions that are keen to invest your money and support their loan activities in the wake of more expensive wholesale money and limited international sources of funding.

The higher rates for short and medium-term investments and innovative low-risk products have made it easier for investors to increase their wealth from lazy cash. Combining this with anticipated further rate increases, new low-risk cash investments are expected to further increase in popularity as the markets ease into recovery.

Many investors still have money in low interest bearing accounts; often without realising what other low-risk investment opportunities are available. But, instead of jumping straight into another cash account, it might be time to think about some of the qualitative criteria necessary to help you make the right move instead of just seeking the highest-earning account.

Immediate Access to Cash

Many people hold far more than they need in a standard savings or cheque account which typically offers little interest in return, so it’s worth considering a switch to a call account. Offering instant access to your savings with the ability to make withdrawals and deposits at any time, a call account is typically a better option if you require regular access to your funds.

Banks calculate their rates differently, but finding a call account with an attractive rate is always advantageous. Be cautious about hidden fees and charges and be aware of the terms and conditions associated with special offers. Rules and benefits differ depending on the account you choose.

Account Entities

It may be worth opening a savings account in the name of the most beneficial entity for tax purposes. For example, if your spouse is not working, saving in their name may be more beneficial than in your own name if you are on a higher marginal tax rate.

In addition, the current Government guarantee1 covers each entity for up to AUD$1 million, so if you have more than AUD$1 million to invest, you may extend this guarantee by opening accounts in the names of several entities. This tactic may become particularly relevant when the government guarantee expires and is perhaps reinstated at a lower threshold in 18 months time.

Locking Money Away

By placing your savings in an account for a fixed term, usually anywhere from one month to five years, you can save for a predefined investment goal by potentially earning a higher rate. This strategy is particularly relevant in an increasing interest rate environment. In these circumstances, medium term cash rates have the anticipated rate increase ‘built in’ and are therefore often higher than call rates.

You also get the added benefit of securing the rate for the term of the account, so you always know how much you will make on your investment without losing out if your financial institution lowers its variable deposit rates.

Check Your ‘Lazy Cash’

Check all your savings accounts to see if you are earning a reasonable rate of interest. Often the high rates advertised are excluded for accounts held in company names, trusts or super funds, and therefore cash held in these accounts may continue to receive a very low rate of interest. Also, switch to using a single current account for daily transactions and debit orders so that you only need to keep a small amount of low interest-earning cash in one account. This should mean that you can earn a higher rate by keeping more money on call or in a fixed deposit.

A self-managed super fund (SMSF), in particular, can have cash sitting around for long periods of time as it accumulates or between investments. You need to ensure your SMSF receives a reasonable return on cash, and if it doesn’t, look for an account that does.

Checked your Interest Rate

All too often people move their cash into a new account with a seemingly attractive rate only to see the return plummet as time goes on. This could be because initial offer terms expire, or because many accounts have various terms and conditions such as minimum balance requirements, limited withdrawals and break fees following withdrawals and bill payments for example.

Trevor Knowles from Investec Experien is well known in the optical industry. Trevor has extensive experience in delivering tailored and innovative finance solutions to healthcare professionals. Trevor can be contacted on P: (AUS) 0410 553 854 or E: [email protected]

Footnote
1. Deposits made with Investec Bank are guaranteed by the Australian Government as part of the Financial Claims Scheme for amounts up to AUD$1 million per client. Amounts in excess of AUD$1 million are also eligible to be guaranteed on application under the Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding. The terms of the government guarantee may change in the future and Investec reserves the right to amend these terms accordingly.
Disclaimer
Investec Experien Pty Ltd ABN 94 110 704 464 (Investec Experien) is a subsidiary of Investec Bank (Australia) Limited ABN 55 071 292 594 (Investec Bank). Deposit products are issued by Investec Bank. Before making any decision to invest in these products, please contact Investec Experien, a division of Investec Bank, for a copy of the Product Disclosure Statement and consider whether these products suit your personal financial and investment objectives and circumstances. We reserve the right to cease offering these products at any time without notice.