Is your money safer in your wallet or in the bank?

Some Australians are understood to be taking money management into their own hands… literally. But is stockpiling cash really safer or better than keeping your money in the bank?

In a speech to the House of Representatives Standing Committee on Economics last week, Reserve Bank of Australia (RBA) governor Dr Philip Lowe mentioned that as well as helping the federal government manage its economic support packages, the RBA has been working hard to support the “increased demand for banknotes”:

“While COVID-19 has accelerated the shift to electronic payments, there has, paradoxically, also been record demand for banknotes. Some people seem to be wanting to keep some extra money at home. The result has been that the stock of banknotes on issue has increased from $83 billion in February to $94 billion today. We have met this extra demand despite our main storage vault being located in one of the coronavirus hotspots in Melbourne.”

If you feel more comfortable keeping a ready supply of the folding stuff close at hand, or if you're concerned about the safety of the money you put in the bank, that’s fine. But when it comes to hoarding cash under the mattress like a slumbering dragon, there are a few potential risks to consider:

Your money could be lost, stolen or destroyed 

One of the main risks of investing in physical assets, such as a briefcase full of fifties, is that your wealth is physically held in the banknotes themselves. If you can’t access your banknotes (such as if you leave them at home while you’re out, or you bury them under a big X), you can’t easily spend them.

Furthermore, if your cash is stolen (whether in a mugging, a break-in, or an elaborate scheme masterminded by Hans Gruber), or destroyed (a very real risk if you live in a region of Australia that’s vulnerable to bushfires or floods), your money is gone, and may be impossible to recover.

Cash transactions could be a virus risk

If you’re taking cash out with the goal of spending it, keep in mind that this could put yourself and others at risk of spreading and/or contracting the coronavirus.

Coins and banknotes can serve as disease vectors. Considering that it’s possible to spread COVID-19 via respiratory droplets from coughs and sneezes, one cash transaction with someone who hasn’t washed their hands could mean risking future health problems.

Money under the mattress isn’t doing anything for you

Money locked in a safe or stashed under the floorboards isn’t going to grow anything other than a fine coating of dust. This can lead to problems when inflation affects the buying power of your money – for example, if ten years ago you put enough cash to buy a movie ticket in your piggy bank, today that pile of coins may only let you buy a small popcorn.

Keeping your money in the bank makes it possible to earn interest on your savings, and grow your wealth over time. Admittedly, interest rates on savings accounts and term deposits aren’t at their highest point at the time of writing. It may be worth comparing your options and looking for a higher interest term deposit, or a savings account with a higher bonus rate and terms and conditions that are easy for you to fulfil, so you can earn enough interest to help offset inflation.

What if savings account interest rates go negative?

Following consecutive cuts to Australia’s cash rate last year, there has been speculation that the RBA could drop the cash rate down to negative figures – a situation that could theoretically lead to banks actually charging interest on savings accounts, rather than letting savers earn interest on their wealth.

Although the pandemic and recession has put pressure on Australia’s economy, the RBA has stated that it is “extraordinarily unlikely” that it would send rates negative. 

Money in the bank is guaranteed by the government

Are you taking cash out because you’re worried about your bank going out of business thanks to the recession? Depending on your situation, you may not need to worry, as Australia’s federal government guarantees money deposited with Authorised Deposit-taking Institutions (ADIs).

Under the Financial Claims Scheme (FCS), the government guarantees up to $250,000 in deposits, per account holder, per ADI. That means if your bank went out of business, you’d be able to claim your money back from the government, up to $250,000.

Even if you have more than $250k saved in your account, there are still options to help protect your wealth in case the worst should happen. If your savings are in a joint account (such as an account you hold with your spouse), each account holder can claim up to $250K under the FCS. You could also look into splitting your money between different ADIs. Check with a financial adviser to learn more about what other options may be available for you.

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