Despite recent hikes in home loan interest rates, the major banks have been slow to raise rates on deposits. But your choice of savings account could be the real culprit behind low returns on your spare cash.
According to research group Canstar, almost one in three deposit accounts pay no interest at all on balances up to $1,000. One in two accounts pay less than 2%, and only one in four savings accounts pay a return greater than 4%.
Things may be a little better if you have a reasonable sum to invest though be on the lookout for 'stepped' - or tiered, interest rates. These apply to around 15% of savings accounts, and the top rates are usually reserved for substantial balances. If your savings dip below a certain level you could be left earning zero interest.
These pitfalls all highlight the need to be picky about where you invest your spare cash.
Along with making sure you are paid interest on the entire account balance, keep an eye on fees. These can have a big impact on your returns. If you are paying $5 in monthly account keeping fees, the cost works out as an annual charge of 3% on a balance of $2,000. That could be more than the interest you're earning.
With plenty of financial institutions and accounts to choose from, it can be difficult knowing where to get a good deal. Canstar's recent Deposit Star Ratings report offers a useful starting point. It compares 392 deposit accounts across different types of users, in the process revealing financial institutions that many Australians may not be aware of. For example, Beirut Hellenic Bank is not a household name but its Smart Net saver scored a 5-star 'outstanding' rating based on a strong rate of 5.9% and zero account keeping fees.
One thing I am often asked about is the security of deposits held with these smaller banks. All financial institutions that accept deposits must comply with the requirements of the Australian Prudential Regulation Authority (APRA), which are regarded as strict by world standards. So while you may not be familiar with a particular institution, is has to abide by the same rules as the big banks.
The federal government also guarantees the security of deposits up to $250,000 held with Australian-licensed banks, building societies and credit unions. It is estimated this covers around 99% of deposit accounts.
Doing some research to find the deposit account that will pay the highest return for your savings is important. But there are other ways to earn decent returns on cash - and achieve diversity within this asset class.
A broad selection of managed funds provide an indirect way to invest in fixed interest assets like corporate or government bonds plus the wholesale money market. Or you can invest directly in Australian government bonds by applying through the Reserve Bank. Visit www.rba.gov.au and click on 'Financial services' to see what's involved.
For more tips on getting more from your money download a copy of my Guide to Successful Investing from www.paulsmoney.com.au.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.