Lazy Loot? Put Your Savings to Work

You’ve got a decision to make.

Now that you’ve started paving your own road to riches, some cash will actually be building up in your account since you made the wonderful decision to stop getting rid of it.

The problem is, you can’t just have it sitting around doing nothing.  That cash needs to be working!  Either saving you on interest payments, or earning money somewhere else productive like investments.

Since money is now your slave, it’s important each dollar works as hard as possible for you.  So, where do you put it?

In simple terms, you want it to earn the highest return possible in a place that you’re comfortable with.  If you have high interest debts, this is the best place to start.

Credit Cards

These can be slugging you as much as 20% per year or more in interest payments!  This is a highly profitable product for the banks.  Pay these off ASAP for the best returns on your money.  Even Warren Buffett wouldn’t be able to beat this rate of return these days!

Perhaps best to cut up your cards also, they aren’t really worth having.  There is no point investing yet if you are losing 20% per year from your credit card.

A good idea might be to see if you can switch credit card providers with a balance transfer offer where you can pay 0% interest for a little while, as you smash this debt down.

Don’t get me started on the ‘points’ issue.  Nothing is really free and people who are sucked in will almost certainly outspend the benefit of any ‘points’ that are earned.

It is possible to game the system here, but the vast majority of people lose!  I put it in the too hard basket myself, it’s not really worth the hassle.

Why do you think they offer them in the first place?  They know most people spend more just to earn some phoney bullshit points.  This benefits the Owners, not the Consumers.  Remember, you’re an Owner now!

Car loans/Personal loans

Interest rates on these are usually around the 10% mark. They can vary wildly though, so check yours out. It may be 6%, it may be 19%. Have a look how much you’re getting milked for!

Once you get rid of this loan, vow to never get sucked into the soul-sucking bottomless pit of car loans and personal loans ever again.  If you’ve already killed or avoided these debts, congratulations!  You’re smarter than most!

This is a strong starting point and something to be truly happy about.  Your expenses will be lower forever from avoiding these traps.

Somewhere more fun….

With these nasty consumption related debts out of the picture, let’s now look at other places to park our savings.

In places where compound interest isn’t laughing at us and in fact can start to really work for us, instead of against us.

High Interest Savings Account

I’m not sure they should even be allowed to call these ‘high interest’ savings accounts anymore!

If you have none of the above consumer debt and no mortgage of your own, this will do as a temporary storage spot for spare cash, until you decide where to invest it.  Using this as a home for your savings, it will currently earn close to 3% per year.

Mortgage/Home Loans

This is a much debated topic.  Should you pay off your mortgage or invest instead?  This will be a topic for a future article.

We currently still have plenty of mortgage debt and I don’t think we will be paying it down anytime soon, other than from property sales.  See our adventures with leveraged property here.

Currently it’s more attractive to invest our cash elsewhere because of the low interest rates, but that could definitely change in the future.

If you feel most comfortable paying this debt off first, then go for it and be proud that your money is working productively, saving you interest and shaving years off your loan term.

Mortgage rates in Australia are currently around the 4% mark. Paying this off gives you a respectable guaranteed return of 4% tax free.

You may also still have access to the extra repayments you make, if your loan allows.  So using a debt recycling strategy may work for you.

100% Mortgage Offset Accounts

This is a feature pretty much unique to Australia and it’s very popular.  It has the benefits of reducing your interest payments but still retaining ultimate flexibility in accessing the cash and doing what you want with it, the same as a normal transaction account.

It’s a great invention.  If you have a home loan, definitely talk to your bank about setting this type of account up and linking it to your home loan.

Investment Property

The most popular place for Aussies to sink their savings.  It has performed well as an asset class and it may continue to do so.

But with record low rental yields and with a few headwinds limiting future capital growth, this option is not as attractive as it once was.  Each investors’ returns would be hugely varied due to the size of deposit used, location, rental yield, mortgage rate etc.

An average capital city property would likely yield around 3-4% or roughly 2 – 2.5% after expenses.  Capital growth is hard to predict so everyone must come to their own conclusions of their expectations for the future.

Prices will likely follow growth in the economy and wages over the long term at perhaps 3% per annum. Total return 5-6% per annum (unleveraged).

We still have a number of properties and we do plan to offload them at opportune times in the future.  In my opinion, the numbers don’t really stack up anymore for property investment in Australia and there are far simpler ways to reach financial independence.

Shares

This is an intimidating place for most people at first. It’s not familiar to us like housing and we hear all the ups and downs in the daily news.  Despite the sharemarket being a huge wealth creator over time, notice how it never gets any positive airtime?

Human endeavour and technological advancement will ultimately be reflected in the sharemarket as it is basically just a running coverage of the biggest businesses and creations of our time.

If you are positive at all about the future of the human race, the future of Australia and the world at large, there is no need to fear the sharemarket.

I went into great detail in this post – Long Term Investing & Shrugging Off Sharemarket Falls.

On the other hand, anyone who is fearful of the future and thinks society is doomed should probably just stock up on baked beans, guns and head off into the woods.  Personally, I don’t think the world is ending – see why here – What if Australia Crashes?

The Aussie Sharemarket currently yields around 6%, when franking credits are taken into account (as they should be).  Earnings, dividends and share prices should grow alongside the economy over the long term, at roughly 3-4% per annum.

This is where we have shifted our investment focus to in the last couple of years and will be the home for the vast majority of our wealth into the future.  And this will provide us with a wonderful income stream and cementing our financial independence.

Total return of 9% p.a.

Peer-to-Peer Lending (P2P)

This is a relatively new and interesting industry that is growing quite rapidly.  It bypasses traditional lenders like banks and offers both borrowers and lenders a better deal on interest rates. Lower rates for borrowers and higher rates for lenders.

We have been investing (lending) on a P2P platform for a while now and we quite like it.  You can find overview of P2P Lending and RateSetter here.

It can be a good spot for savings you don’t mind being tied up. You can choose how long your money is lent out for from between 1 month (shortest) and 5 years (longest).

Currently, we’re happy to invest a small percentage of our wealth in this area.  The rates for lending in the longer term, 3-5 year market, usually fluctuate between 7-9% per annum.

Conclusion

Now the fun begins!  You get to start using your savings to really improve your financial position.

Start by demolishing the high interest consumption debt, if you have any.  This is the best first step as it’s constantly dragging you backwards.

Then you’re free to either pay off your mortgage or invest your money elsewhere to start building up that passive income that will one day make you financially independent.

Don’t worry if you haven’t got it all figured out or it’s a little intimidating.  Remember, perfection is actually our enemy.  Besides, you’ll learn lots along the way.

Just get started and put those slaves to work!