at Knowledgebank IQ | 25 October 2014 | Financial Planning

Good places to stash your cash

While in a lower interest rate market, investors and savers alike can find it challenging to earn a decent rate on idle funds.

Traditional savings products offered through banks only yield a fraction of what they used to, and while the overall equities market has done well recently, not every investor can stomach higher risk for potentially greater returns. 

Fortunately, there are a number of steps that you can implement to make your cash work harder without losing sleep over a greater level of risk. However, these strategies may not work for everyone as they are dependent on your individual circumstances as well as your financial objectives.


Debt Pay-Down vs. Investing

There is an age-old debate centred on whether individuals with excess cash should use those funds toward paying down (non-tax deductible) household debt or if they were better off investing in the market or a high-yield savings account. In the current low-interest rate market, the answer is simple – individuals are better off putting cash towards high-interest debts, such as credit cards or personal loans.


Boost your super

If you are fortunate enough to not have household debt and are still active in the workforce, adding contributions to super above and beyond your employer’s mandatory superannuation guarantee can be highly advantageous. Accumulated savings or excess cash-flow could be easily diverted to the super environment via salary sacrifice (pre-tax contributions) or after-tax contributions. Should you select the pre-tax option, your excess cash-flow can reduce your tax implications each year, whilst growing your retirement account balance at the same time.

For example, if John earns $90,000 each year before tax, (excluding his employer’s super contribution), he could redirect a portion of his earnings through a salary sacrifice program into superannuation (eg, $10,000). By utilising a salary sacrifice strategy, John could pay less tax and boost his super value at the same time. Individuals should note that there are total contribution limits to superannuation, as well as aspects that should be considered prior to making this decision for idle cash.


Other considerations

Additional options for interest-bearing accounts may be available through some online banking institutions, and shorter term certificates of deposit could offer a small degree of earning for idle cash. For each of these options, investors should be prepared to pay tax on the earnings. There may also be interest in seemingly stable equity positions, such as blue chip shares, but investors should be prepared to hold those investments for the longer term in order to ride any waves of volatility. 

Individuals have an opportunity to put excess savings or surplus cash-flow to good use, even in this low interest rate environment. Consideration should be given to paying down household debt in order to save accruing non tax deductible interest costs, as well as the benefits of making additional super contributions on either a pre- or post-tax basis. Finally, higher yielding savings accounts may be available through some online vendors, but the interest earned is taxable. 

Dividend paying shares can be an option as well, but individuals should be aware that higher return only comes with a much higher degree of risk.  

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