What is Money in the Bank Really Costing You?


Mortgage holders across Australia are happy at the moment. Well as happy as one can be. Interest rates are at 20 year lows. This should be good news for businesses looking to borrow and invest, or consumers wanting to buy a home or investment property. The problem for the latter group is that a significant proportion of Australian’s saving for one of these purchases is foregoing $1000s of dollars each year by keeping money in a high interest savings account.

Earlier this year the good people at Suncorp Bank released a special report which stated that the average Australian saves about $427 a month. How do you stack up? Well regardless for the point of this post, we are going to work off that figure.

I have in the past shared with you the long term benefits of saving, and investing into an ETF, and that is the comparison I will make again today. While not risk free, these vehicles over time represent a diversified investment where you can track the market. If you are keen to know more about ETFs read more here.

A follow up article from the one I have referenced above is the Avalanche Effect. This was a very popular post, one of our most viewed ever. It talks about the simple steps you can take to build a nest egg independent of your super. I am going to use the example of 9.12% returns which Vanguard (Unfortunately, we could not get stock quote ASX:VAS this time.) has seen over the past 9 years. It’s important to note this started just prior to the 2009 market crash.

Battling against this is the very safe ‘high’ interest bank savings account. As mentioned in the opening this ‘high’ rate has been ravaged as the official cash rate at the RBA has fallen. In addition to this Banks are passing on more regulatory costs through lower interest rates on your savings, and higher margins on standard variable loans. But in short, the rate which your money earns is falling, and best case is between 3.5% and 4.0%.

For arguments sake we are going to start with a principal of $2000, and add $427 a month as your regular savings. Our ‘high’ interest savings account will work of the 4% interest rate, while the ETF will work of an annual return of 9%. The below is based on a 10 year investment.

High Interest Savings account

ETF

Principal

$2000

$2000

Monthly Deposits

$51,240

$51,240

Interest

$11,240

$29,343

Total Nest Egg

$64,480

$82,583

The key line I want to draw your attention to is the interest earned. This is the return your money has made while you Netflix and chill. The difference is $18,130 over a 10 year period, a 34% variance off your principal and monthly deposits. Pretty big deal I know.

The interesting part is when you change from 10 years to 20 years. For your benefit I have done that in the below table. Once again I want to draw your attention to interest earned.

High Interest Savings account

ETF

Principal

$2000

$2000

Monthly Deposits

$102,480

$102,480

Interest

$52,485

$168,873

Total Nest Egg

$156,965

$273,353

This time the variance is $116,388. Okay it’s a longer period. But 111% variance off your investment is big dollars. It is the kind of difference that separates the Joneses from everyone else. And for those playing along at home, if you kept it there for another 10 years (30 in total) you’d have a variance of $431,109, or 277% of your investment.

A somewhat provocative headline. How much money are you losing? But the above attempts to illustrate exactly how much. Clearly your own situation and risk appetite will affect your eagerness to adopt the ETF investment strategy, but regardless consider the long term impact, and remember the compounding growth opportunities.