Why cash isn’t king – time to take it from under the bed

Almost every time Reserve Bank Governor Philip Lowe has cut interest rates over the last year – and he has done a lot of cutting – he also issued an apology to retirees and savers who have relied on term deposits to fund their lifestyles and reward their savings.

It has certainly been a steep fall. Back around 10 years ago during the Global Financial Crisis the Australian banks were desperate for funding, so they were rewarding savings with around 8 percent or so in interest on term deposits.

Fast forward to 2020 and you are lucky to find 2 percent interest, although Westpac do have a 3 percent rate specifically for young people aged 18 to 29.

For the rest of us, we are looking at even skinnier returns for our cash and that means that, if we want our money to get to work, we need to go out and find alternatives to stashing it under the bed.

An obvious first move is to put the money into the sharemarket or into a managed fund, but these have inherent risks and fund managers also charge fees for their services.

One alternative is to explore the world of fixed income investment, and put the cash into a bond fund.

It is possible to buy and sell exchange traded Australian Government Bonds or eAGB’s on the Australian Securities Exchange just as you might buy shares.

Government bonds are very low risk investments, so that is a tick, but the problem is that yields on these bonds are also very low right now.

The benchmark 10 year bond has a yield of only 0.8 percent if you buy it on the secondary market.

If you bought the bond directly from the Government on the primary market you would enjoy a coupon rate of around 5 percent, but most of the bonds are on the secondary market where returns are based on yield.

Beyond that, corporate bonds – or those issued by private corporations – are considered riskier – but they do deliver significantly better returns.

The Australian Bond Exchange, for example, advertises that it can deliver better returns than term deposits, dividends or cash, and this is because it says it offers investors direct access to the primary market paying a coupon rate.

Another alternative is to invest in mortgage fund, which is where a financial provider raises funds which it then lends to purchasers of property.

Some of these, such as those advertised by Australian Unity, claim to offer rates as high as 9 percent.

LaTrobe Financial also offers higher rates for cash through its credit fund, which is a fund the firm uses to lend to other clients, usually corporates. Here, the firm is offering rates from 6 percent for its “peer to peer” fund.

The there is the option of the foreign exchange market. The Australian dollar has increased in value from US57 cents in March to the US71 cents this week.

This means that, right now, $US are cheaper to buy than they have been for several months, and indications are that they could go lower still. But making a profit depends on the greenback rebounding, although history suggests that it will.

Many banks offer multiple currency accounts which allow people to switch funds around, and there are also dedicated foreign exchange trading houses offering retail accounts.

Perhaps the most left field place to make your cash work is in the world of crypto currency, such as Bitcoin.

Just as investing in gold has always been considered a “safe haven,” so it seems that Bitcoin is enjoying the same status during the COVID-19 pandemic.

In March of this year, a single Bitcoin was trading for A$7741, while today it is worth more than A$15,300, an increase of 97 percent.

Compare that, for a moment, with the returns from savings deposits.

In addition to his apologies to savers and retirees, the RBA’s Philip Lowe is constantly repeating that interest rates will be low for several years.

For those who want, or need, their money to work harder for them that means that its time to think about alternatives, or miss out long term.