by Scott Pape - August 19th 2011
WHAT we’re seeing in world share markets is a slow motion car crash that neither side appears willing to avoid: much of Europe is being held together by a pilsner and a baguette, and the Americans are racing towards their next debt ceiling (and an election).
In these uncertain times it’s smart to stash away some cash, if only to be ready to pounce on an opportunity or three.
Here’s how to get the best bang for your buck:
This week the majority of lenders have slashed their fixed term deposits. If you’re willing to lock your money away for two years, you’ll get an average 5.69 per cent, and for three years it’s slightly higher at 5.77 per cent. So should you lock your money away?
Well, I’m not, and here’s why:
The prevailing wisdom is that the banks are cutting their rates in preparation for a drop in interest rates because of the crisis in Europe and America. Maybe. Or maybe it has something to do with the 3-6-3 rule of banking: “Pay 3 per cent to depositors, lend it out at 6 per cent, and be on the golf course by 3 pm.”
The rise of the cautious consumer has seen lending demand drop to a 34-year low, which Damian Smith from RateCity.com.au tells me translates to the banks having $35 billion more in deposits than they did this time last year.
So in effect the banks are paying out interest to savers but it’s becoming increasingly difficult for them to lend it out at a profit to borrowers. And that’s the real reason behind them slashing their rates.
NAB chief Cameron Clyne made the point during the week that cutting interest rates may stimulate savings, but not the economy. (Decoded banker-speak: the average punter may see a drop in rates as a sign of weakness in the economy.)
The wash-up is that if you think the Reserve Bank will sit on its hands this year you’d be smart to stick your money in something like the UBank USaver, which offers 6.51 per cent as long as you deposit $200 a month (limit $200,000).
Want to go another round? If you have a decent amount of equity in your property, right now is one of the best times in years to shop around for a better deal. Now is a great time to take action, so flex your financial muscle.
Tread Your Own Path!
Photo: http://www.flickr.com/photos/seanfx/5092674798/
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7 comments
I am 60 years old, from the 6th July this year, I can get my super now, or do I exist on my savings and rent from my investment property, the supa is tax free now, do I take it all out, and just let it sit in the local bank. 80% of the supa goes into a term deposit, in supa, which is the same interest as the local bank, do i take it out, before the government make any changes in regards to supa..
Margaret, you need to speak to a fee only financial advisor. There are many options available which they will explain to you once they have considered your situation and goals.
You give new hope for a revival of commonsense! Good on ya Scott, keep up the good work, it’s inspiring…:)
Hi Scott, I’m confused. The banks have been telling us for the last three years that they have beenn forced to raise their variable mortgage rates by more than the RBA increase because money is hard to come by. Now they have more than cash they need but still their variable mortgage rates remain massive. Can you explain why??
Why are all the financial advisors in denial about the impending death of the share market. Isn’t the current debt crisis beyond recovery. In an interview which aired on the 9 August, Gerard Minack of Morgan Stanley was claiming that thirty years of growth in the western world was coming to an end. Today Morgan Stanley have expressed serious concerns about another GFC!!
should point out you need to set up an automatic transfer of $200 a month in order to get the full 6.51%. took me a couple of months to realize this.
i was hoping you would say invest in shares but it looks like im already doing the right thing keeping it with ubank for now. guess i have learnt something
In relation to your last comment, we have 80% equity in our property and as we are in rural Warrnambool we want to by in Eltham Melb, We can borrow enough to buy next year. So this wuld be an extra property as well as our DYI super fund. I am guessing that in 2012 would be a good time to buy and interest rates will remain low.