Personally, I have a problem with cash at the bank as an investment. Don’t get me wrong, cash is important, it stops you reaching for the credit card when an emergency (or impulse buy) pops up. Most experts suggest you have three to six months cash saved up in a high interest savings account, just in case the worst happens. I totally agree with this idea, try to imagine if you lost your job and you didn’t have savings to fall back on? You’d be living off a credit card until you get a new job, it’s not fun, trust me I was there when I left a full time job to go to university.
But I digress, let’s say you found a high interest savings account that was paying 6% interest per annum (which many are at the time of writing). Some may think, “Wicked, a 6% return guaranteed. That’s way better than the negative forty-something percent the stock market had last year. My money will be safe there.”
Wrong.
You’re money is only safe there if you plan on using it for something in five years time (such as a house deposit or car purchase). As a long term investment, cash sucks!
Here’s why:
It is unfairly taxed in Australia: Unlike shares and real estate, there is no Capital Gains Tax discount or dividend imputation here. The interest on cash is taxed at the full marginal tax rate. This means if you’re in the 30% tax bracket then 30% of your interest is going straight to the government.
Your earnings are eroded by inflation: If I were to pick a random year in the past, say 2005 inflation was 2.8%, the cash rate was 5.7% so a good term high interest account would collect 7.7% (about 2% over the RBA cash rate). Now once we donate 30% to the tax man we’re left with 5.39% in our pocket, then once we let inflation chew up the rest, we’re left with a measly 2.59% net return on our money. Good luck getting to a million dollars at 2.59%!
I think the only time cash makes an appropriate investment is when you cannot afford to lose your money in the stock market or real estate market. Such times would be; when you’re nearing retirement and when you’re saving for a house.