When it comes to saving advice and looking forward with goals, no other financial product or investment comes more highly recommended for flexibility than cash savings.
Cash is liquid, accessible and easily translated into other investments whenever required. Former senior Reserve Bank official Peter Mair even made headlines recently when he indicated elderly Australians who hoard $100 notes could be the reason why an extraordinarily high number are in circulation.
For some, a stash of cash under your bed might seem like the most flexible option around, but those more savvy with their personal finances will want their savings working harder.
Flexibility with a goal
A flexible savings plan could include a high interest savings account where you know exactly what you are hoping to achieve by the date you plan to access your next egg.
Say you had $5000 and you wanted to see that grow tenfold to $50,000. Using compound interest from a high interest savings account returning 5 per cent you could time this growth to suit you. If you wanted to achieve this within five years you would need to be topping up your account with $148 each week.
After five years, you can add $38,480 of regular investments to your initial $5000 and combine this with $6,504 of interest. Not bad considering the entire time you could see exactly how this was growing. This makes planning for short-term goals extremely easy.
High interest as a long-term plan
Not to be discounted for its short-term performance, compound interest may start to shine when given extended periods to grow. If you wanted to pass on your own saving advice, say for a child’s 21stÂ birthday, compound interest helps reach that goal using less of your personal cash.
If you wanted to turn $5000 into a $250,000 nest egg after a 21-year period you would need to kick in $124 each week. This time, your regular contributions amount to $135,368 and the interest accrued is $109,632.
A case for cutting up that credit card
What about savings as your everyday option? The credit card you initially got for the “flexibility” may be having the opposite effect of your savings. If you have a credit card debt around the average of $3000 at just 16 per cent (many are higher), your minimum repayments would be around $61 a month. Paying the minimum, you will end up pouring in $7504 over more than 20 years.
The opposite of credit stress
So if minimum repayments could easily string your credit debt out to 20 years, imagine what that $61 could do in high interest savings. At the same 5 per cent rate, you could end up $24,855 richer. You have only contributed $14,640 and interest has been $10,215.
Managing credit card debt and savings
You could potentially manage both credit card debt and your dream of a high interest savings account if you feel like you are not yet clear of your credit balances.
Is there a card with an introductory offer or a low interest balance transfer option? You could transfer balances to low or zero interest rates while automating your payments to clear debt before balances revert to higher rates.
Meanwhile, any remaining funds you can manage to squirrel away could be channelled into high interest savings. But remember, even if you have an introductory rate of zero per cent you need to pay $500 a month onto your credit card debt first to clear your balance. Otherwise, your remaining debt will eat into those high interest dreams.
Next time you choose credit purely for ease of use, consider whether your own savings offer far better long-term flexibility. If you use credit to bridge the gap between income and living expenses, the answer is always a resounding ‘yes’.