How to stop your money from going backwards

Savings accounts let you earn interest and grow your money. But moving your cash into one of these accounts doesn’t always guarantee you’ll build wealth and come out the other side in a better financial position than you started. That’s because if you put your cash into a savings account or term deposit with an interest rate that’s less than Australia’s current inflation rate, you’ll effectively experience a loss.

When interest on a savings account is less than inflation, your savings may still be growing in dollars and cents, but your money isn’t maintaining its buying power. Regardless of how much money you save and how much interest you earn, by the time you reach your savings target, whatever you were saving up to buy will have increased in price and your dollars won’t go as far.

For example, if you have $1000 in an account that pays a 2% interest, after three months you’ll have $1020. If the rate of inflation is running at 4%, you would need $1040 to have the same buying power that you started with. So even though you’ve gained $20, you’ve lost purchasing power as you can’t buy as much with your money.

This is a problem, because it defeats the purpose of a savings account entirely, which is to make your money work for you and to get more out of what you have.

So, how do you avoid losing the value of your money over time? By depositing it into an account with an interest rate that doesn’t just match but exceeds the existing inflation rate, which currently sits at 4.9% as of July 2023 according to the monthly CPI figures from the Australian Bureau of Statistics (ABS).

Since May 2022, the Reserve Bank of Australia (RBA) has been repeatedly raising the cash rate to lower inflation. Consequently, this has been pushing up interest rates on loans, and also on savings accounts.

While this has made things tough for mortgage holders, there is a silver lining for savers. This means that it’s now possible to secure a savings account with an interest rate that’s higher than inflation, and really grow your wealth - something that hasn’t been possible for a few years due to the low interest/high inflation environment we’ve found ourselves in.

While the big four banks have been reluctant to pass on rate rises to savers, there are smaller lenders who are happy to, including a new highest savings rate hitting the market at 5.65%. You can compare high interest savings accounts to see what’s up for grabs and what might work for you. Just remember, you may need to satisfy certain terms and conditions to earn that higher bonus interest rate, like making regular deposits or minimising withdrawals.

If inflation continues to fall and interest rates rise on more savings accounts, more options may become available to really start growing your wealth.

While savings accounts and term deposits are common options to build wealth, they’re not the only choices. Some other avenues for helping your money grow include:

Term deposits

Unlike a savings account that pays you bonus interest if you meet the conditions set out by the lender, a high interest term deposit gives you your earnings at maturity. They also typically offer a higher base interest rate than saving accounts in exchange for you locking your money away for a longer length of time.

Since you won’t be able to touch your money for a certain period of time while it earns interest, if you need to withdraw your funds from a term deposit early, you’ll likely have to pay a penalty or receive interest at a lower rate. So, be sure to carefully assess your liquidity needs and that you have adequate funds available if unforeseen circumstances crop up.

Investments

Putting your money into bonds, shares, managed funds or property could let you enjoy higher returns than savings accounts, though they do tend to come with more risks because of the unpredictability of these markets.

If you want to invest your money, be sure to research your options carefully so you’re confident in your decision. A beginner's guide to financial investments could be a great place to start, covering the key investment types and their risk level.

Superannuation

Superannuation isn’t just a way to set money aside for your retirement; it’s also a way to grow the wealth that you deposit. Your investment options will depend on what super fund you’re with, and the returns can differ from option to option as well as provider to provider.

If you’ve never investigated where your super funds are being invested (or could be invested), it might be worth working out how you could squeeze more out of your super.

Just remember: in most cases, you won’t be able to touch the money in your super fund until you retire. This means super may not always be the best option for saving money over the shorter term.

While it’s easy to see an increasing dollar sign in your savings account as a positive thing, if the interest is lower than inflation, you’re actually cutting into your purchasing power and costing yourself a serious amount of money.

To stop your money from going backwards, consider seeking out accounts where interest is higher than the inflation rate. This can put you and your money in a much better position.