Invest or save: growing your money in a low-rate environment

Low rates mean those with mortgages may be breathing a sigh of relief, but low interest on savings accounts make it much harder to save and grow your money.

Have you checked the amount of interest you’re getting your savings accounts recently? Chances are it’s sitting around 1%. The RBA’s record-low interest rate is designed to encourage Australian households to spend money and invest to stimulate the economy, rather than keeping cash in savings accounts.

For the RBA, encouraging people to spend and invest is a must before they consider raising rates again.

“Central banks have for some time been responding to fundamental shifts in the global appetite to save and invest,” said RBA Governor Philip Lowe when announcing the October 2019 rate cut.

“The underlying explanation for low interest rates globally is that the global appetite to save is high relative to the global appetite to invest.”

In the past, it may have seemed like an easy decision to keep your cash in savings accounts, term deposits and low-risk bonds.

But as the cash rate moves closer to zero as the Reserve Bank makes cuts to the cash rate, the interest you’re earning now on your savings may not keep pace with inflation for long. In effect, that means your savings could be going backwards if they can’t keep up with the cost of living.

When you’ve got a mortgage, you need to make sure you have enough to cover your repayments as well as your cost of living. So it can be a good idea to invest your money, instead of just saving it. But there are a few things to consider first.

“Low interest rates can be very beneficial for those who invest, and investing offers the potential of strong returns. In fact, many investment options can perform better when interest rates are cut or when the economy isn’t performing.”

Borrowing to fund your investment

Of course, it’s important to do your research into the investment types that are right for you but, when you’re paying off a mortgage, it can be an added challenge to have enough capital to get started. One of the ways you could build an investment portfolio faster is by borrowing to invest.

This might sound risky, but the reality is that by taking out a mortgage you’ve already borrowed to invest in property. Without a mortgage, you’d most likely be years away from being able to afford a home.

Low interest rates can be very beneficial for those who invest, and investing offers the potential of strong returns. NAB Equity Lending Head of Sales Craig Saunders says that the share market can be a good starting point for those who are borrowing to invest.

“You can get started with as little as $1,000, [while] entry and exit costs are also very low.” he says.

However, if you’re borrowing to invest, you need to make sure that your after-tax investment returns will be greater than all the costs of the loan, including interest and fees.

Reduce your debt levels first 

Debt can be a huge problem for those looking to make the most of their money. In fact, the 2019 ABC Australia Talks National Survey found that household debt topped the list of what Australians consider the biggest problems our society is facing – tied with the cost of living and drug and alcohol abuse.

If you have debt that you’re paying off – including your mortgage – paying off as much as possible while interest rates are this low can reduce the amount you pay in interest over the life of your loan and free up some of your earnings to invest.

And putting money back into your mortgage will increase your equity, meaning you can open up credit for things like renovations – directly investing in the value of your home. But be sure that understand the limits to the amount you can repay in a given period.

Putting together a budget to suit your circumstances is the first step to reducing debt. Just remember to make it flexible, so you can afford unexpected expenses without needing to borrow more.

Understand your appetite for risk

It can be worth considering using your savings to invest in other assets, such as an investment property or shares. But it’s important to first consider your appetite for risk which is a big part of investing.

Everyone who invests has a different appetite for risk – the degree of uncertainty they are prepared to accept in relation to the investment returns they could receive. After all, investments that offer greater opportunity of returns often come with greater levels of risk.

Your appetite for risk will depend on factors like your age, income and financial goals. The longer you’re investing for, the more likely you’ll be able to tolerate short-term losses because your investments will still have time to recover.

One way to reduce the investment risk you’ll face is to diversify your investments. Diversification won’t guarantee gains or protect against losses, but it can help you achieve more consistent returns over time. Putting some of your savings into shares could protect you from a downturn in the housing market, for example.

Ultimately, how you choose to invest – if you decide to invest at all – is dependent on your personal and financial circumstances. So it can pay to put together a plan that considers your goals, needs, budget and investment timeframe.