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Savings Accounts...The Investor’s Nightmare In Disguise

by Executive Partner Mark Pozzi

If you are like many clients who I see day in day out you will have a savings account which you often use to put money away for that ‘rainy day’. The savings account however, is the tax man’s favourite investment. There are now more savings accounts open in Australia than there are people, and in this current economic environment, which is filled with insecurity, high interest rates, and therefore high returns on savings accounts; people cannot seem to get enough of them.

At this stage if you are feeling like you should go back to school and learn how to manage your money don’t worry, you’re not alone. Even my own partner had a savings account up until a few months ago. But why are savings accounts so bad?
Let’s take a typical investor these days. He has a loan on his family home for $400k and has a savings account with $50k in it. Between him and his wife they have a total income of $150k per annum. Every month he makes repayments to his home loan and the remainder he places into his savings account as he is saving to buy a new car.

On the face of it, what this family is doing does not seem to have any faults. They are paying off their mortgage and then saving the remainder. However this family is paying thousands of extra dollars in tax every year as well as paying extra interest on their home loan.

This family’s savings account earns interest at 7.5% or $3,750 a year. However the family will pay tax on this amount so they only actually receive $1,900 in their pocket. Their family home loan is however at 9%. By not paying this extra $50,000 into their home loan they are paying an extra $4,500 a year. Their net effect is a loss of $2,600 by having this savings account.

Many banks are now offering a wide range of products which deal with this problem. One of my favourite is the Viridian Line of Credit from the Commonwealth Bank. This loan product allows you to have unlimited redraw on your loans while having your weekly wage sitting against the loan reducing the amount of interest you pay every day. When this is coupled with the use of a credit card your money can sit against your home loan for an additional 55 days. This could wipe 10 years off the average Australian home loan. On a $400k loan this could save you $300k of interest. Think about how much extra money you could make by using this extra equity in your home.

If you’re a person who does not have a loan and is building up a savings account, think about an investment into a leveraged portfolio of shares. These can be very tax effective, and if held for longer than 12 months have shown historically to always outperform a savings account. 

If you are unsure which way to head with such investment decisions feel free to contact The Intelligence GroupTM and one of our qualified financial planners will be happy to direct you in the right direction.

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