Whether you are a saver or investor is an interesting and important question because in the long run it could make a major difference to your lifestyle. To determine if you are a saver or investor let’s look at the characteristics of the two categories.
What does a saver look like?
Almost by definition the money you put in bank accounts, Cash Management Trusts or Term Deposits are short-term savings. You may use these to save for a short-term goal like a holiday or home deposit. It’s not targeted at a long-term goal, like using superannuation to save for your retirement, for instance.
Your savings are accessible. You can go to the bank (or your laptop) and get your money back pretty much immediately.
The returns are low. Back in the day (well actually, a long way back in the day), you could get nice returns on your cash. But low interest rates and low deposit rates have become the order of the day, and it doesn’t seem as though things are going to change any time soon. In fact, the Reserve Bank of Australia Governor Philip Lowe has said that interest rates are likely to stay low for an extended period.1
A quick search of the latest 12-month Fixed Term deposits shows you’ll struggle to get more than 1% on your money.2 Outside of special short-term offers, your average savings account return would be even lower, especially after you take inflation into account.
Why be a saver?
As you can see from the above, there are a range of reasons we save. Sometimes it’s to accumulate cash towards a bigger purchase (like a holiday). That’s often a sensible alternative to credit card borrowing.
Sometimes it’s for security. Financial experts suggest having a rainy-day fund equivalent to around six months of your salary.3 Coincidentally, that’s the time it can take to find a new job. Given the current unemployment rate, there’s a lot of smart savers who’ll be glad they put money away for the day when the Covid-19 virus rained down on our heads.
So, what does an investor look like?
Investing is more typically a long-term pursuit. It can last for decades – think superannuation or investing in shares or residential property. Most financial planners wouldn’t recommend the average investor buy shares or managed funds if their timeframe was less than five years.4
Invested money is less accessible. Lots of investment choices either lock your money away (such as super) or take months or even years to turn into a profit (such as a house). While you can almost always sell shares and managed funds instantly, the volatility of the stock market means ‘parking’ cash in shares is usually a bad idea.
If you’re looking for your share investments to pay for a large, unexpected bill, you could find you have less to take out than you thought. A good rule of thumb with shares is: don’t rely on them for short-term cash, they’re for long-term growth.
Historically, returns have been higher. In general terms, longer-term investments like shares and property generate better returns than cash savings. As MLC’s Financial Year Summary highlights, local and international shares outperformed cash by over 5% a year over the past ten years.
Sometimes but not always, investment assets can be more tax effective, depending on your tax circumstances. Based on your tax circumstances as well as how your investments may be structured, your investment property can offer tax deductions and depreciation allowances. Many companies listed on the Australian Stock Exchange offer “franked dividends,” which means investors/shareholders receive a tax credit that can be offset against other income. And super has a whole range of tax concessions. But the return on money in your poor old cash account is taxed just like the income you earn from your job.
The good news – you’re already an investor
As you can see, saving is important for security and to start you towards being an investor.
Investing – putting money into potentially higher-returning, long-term investment products – is what could eventually enable you to replace your work income with investment income.
The good news is you’re already doing it. Almost all working Australians are investors thanks to compulsory super. A recent paper from the Association of Superannuation Funds of Australia (ASFA) points out that as a country we invest over $70 billion dollars in super each year,5 and that with balances at around $200,000 per family,6 superannuation is easily the average family’s second biggest financial asset (after the home).7
So, you’re already an investor. That’s good news and a great start. But remember that our retirement system is made up of three components – super, investments outside super, and the means tested age pension for those who don’t have enough in super and outside super.
If you’d like to explore the investment options within your super, or explore other options, like shares and managed funds outside super, give your financial planner a call on 0438 334 334.
1 Interest rates to stay low but unlikely to go ‘negative’ says RBA boss Philip Lowe. By business reporter Nassim Khadem, Tuesday 26 November 2019. https://www.abc.net.au/news/2019-11-26/interest-rates-to-stay-low-but-unlikely-to-go-negative-says-rba/11739728. Accessed 14 August 2020.
2 Compare 12-month term deposits. Shirley Liu, 27 April 2020. https://www.finder.com.au/term-deposits/12-months#start_comparing. Accessed 14 August 2020.
3 How to protect your rainy-day fund when it rains a lot. If you have a rainy-day fund but it always seems to be raining, here’s how you can save for a more secure financial future. Tim Falk, 27 April 2020. https://www.finder.com.au/how-to-protect-your-rainy-day-fund-when-it-rains-a-lot. Accessed 25 September 2020.
4 Choose your investments. How to find the right investments to help reach your goals. https://moneysmart.gov.au/how-to-invest/choose-your-investments. Accessed 25 September 2020.
5 The benefits of Australia’s compulsory superannuation system. ASFA. June 2020. https://www.superannuation.asn.au/ArticleDocuments/359/2006-The-benefits-of-Australias-compulsory-superannuation-system.pdf.aspx?Embed=Y. Accessed 14 August 2020.
6 Media Release Average household wealth tops $1 million related to: Household Income and Wealth, Australia, 2017-18. Australian Bureau of Statistics, 12 July 2019. https://www.abs.gov.au/statistics/economy/finance/household-income-and-wealth-australia/latest-release. Accessed 14 August 2020.
7 The benefits of Australia’s compulsory superannuation system. ASFA. June 2020. https://www.superannuation.asn.au/ArticleDocuments/359/2006-The-benefits-of-Australias-compulsory-superannuation-system.pdf.aspx?Embed=Y. Accessed 14 August 2020.
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