Friday, April 17, 2009

Where does my money live???

Let me ask you a simple question. If one of your dollars was like one of your children, how would you treat it? Before you go all silly and suggest I'm a bit of a fruit loop (yummy), lets consider that notion.

You want the best for your kids. The best clothes, the best pram, the best school, etc. etc., but what about your money? Do you want the best for it? Most people wouldn't "dump" their kids into a crap school, yet most people dump their money into a "savings" account. I am sure many of you have pondered over throughout the millenn
ium, why these accounts are called "savings" accounts? I actually have the answer:

It "saves" the bank having to go and ask for loans from the reserve bank. It "saves" them interest. Are there any benefits to you? Well, yes, you get a fancy (debit) keycard and you can use it to buy panda bears and measuring tapes, but in reality, the benefits are minimal. You may even be one of the lucky ones that gets a 0.01% interest bonus per month! Hurrah!

Of course having a "savings account" (which many over 50s have caught on to and are wooing young lasses by suggesting they should be called "spending accounts" ha ha, bloody ha) is important and you must have one for instance if you need cash from an ATM and of course EFTPOS machines takes these cards as well. 

So you may now be asking, what the hell can I do to maximise my "passive" cash sitting in my savings account?

Fortunately, a number of special products have been created that actually help you earn more than 0.3c per month. Let's have a quick look at these:

Online Savers

Every one of the major banks, and even some savvy financial lenders have online savings accounts. These earn modest interest from anywhere between 1-3% less than the going mortgage rates. They have the added bonus of having no fees (if yours does, GET OUT NOW!) easy access via online banking (I'm assuming you have a computer if you are reading this :P) and monthly interest payments. 

XX days Interest Free Credit Cards

This is your best weapon to reduce the boredom that currently is having your money in a savings account. While credit cards are inherently evil, they can be utilised to provide a nice little cash flow management account. Typically, smart people use their credit cards to make purchases knowing that they have the cash in another account
 to pay off the purchase before the interest period kicks in. 

- You can keep your cash in a income producing account for longer.
- Most credit cards come with rewards, that may equate to you being able to buy a toaster with your 30,000 points. 
- You won't have to worry if you have the cash in your account (although you should know you can repay the purchase).
- Having a credit card makes you feel like you're invincible and you get to live the high life of Paris Hilton or Bad Pitt.

Not so good bits
- Credit cards make you spend and sometimes the balance can get out of control. You must be disciplined to use one.
- If you don't pay off during the interest free period, you may have to eventually sell a kidney.
- Usually, credit cards have annual and monthly fees. If used accordingly, the rewards often offset this charge and some cards even allow you to pay your fees with  the required points (like mine from the CBA).

Offset Accounts

If you are one of the lucky ones that has a mortgage in Australia and are paying off principal and interest, you can probably link an offset account to this mortgage. Any spare cash you have sitting in this type of account, virtually makes you the equivalent cash at the interest rate of your mortgage, since you are paying down the principal. This can be a happy little bonus in the long term, but may seem like a waste of time when you realise that for every $1000 you are offsetting, you make back $1.50/week in interest savings. Still, $1.50 is useful if you want to buy second hand jeans from Vinnies

So how does all this work?

By setting up your cash flow structures differently, you can be like me and have only a small amount of cash sitting in your "savings account", while having your cash work for you in other accounts. For example, my online saver is producing steady income (albeit not huge income) that I will be using to top up my savings and further compound the interest I earn. The credit card ensures I can easily make purchases without having cash in the savings account and can control my cash flow by utilising online banking to transfer funds as required.

As of now I do not have an offset account, but my latest mortgage is P+I, so I will have to investigate the possibility of this occurring

Moral of the story: Even though its only a small amount of income, the right structure of bank accounts and credit cards can reap some financial rewards. 


  1. Very true, very true...income producing accounts are essential of any cash flow strategy. Keep up the good work with these posts, very informative!