Australians are really starting to take charge of their finances and we love to see it. We’re having way more open conversations about money, and financial tools are becoming more accessible than ever before. But there are still a lot of people basing their money decisions on word-of-mouth or advice from a ‘finfluencer’. So, we crunched the numbers to show you how saving, investing and paying off debt can impact various situations.
Interest rates are currently sitting at record lows. There are whispers that we could see them rise again. But as of December 2021, we’re lucky to be earning 0.05%1 on our savings, according to the RBA’s November report. With the current rate of inflation sitting around 3%2, the money sitting in your savings account may give you less buying power in a year’s time.
Perhaps this is why the idea of investing your savings is so appealing. The Australian Securities ExchangeASX has delivered a 9.3% average return over the past 10 years3. That’s a little more enticing than the 0.05% you might be lucky to earn in a savings account.
But investing is a whole other kettle of fish. It’s a deeply personal decision that comes with a bunch of other questions, such as ‘what’s your appetite for risk?’, ‘how long do you plan on investing your money?’ and ‘what do you want to invest in?’
Feeling the FOMO
Earlier in the year, the ASX released its annual Australian Investor Study and the results show that Australia is a nation of wealth builders. Given that 46% of adults hold some form of investment outside of super and property, it’s not surprising that the fear of missing out may be a strong motivator for those sitting on the fence about investing.
Interestingly, the report found that 34% of respondents named ‘becoming debt free’ as a key money goal, which made us think – if you’re getting a 9.7% return on your share portfolio but paying 17% interest on a credit card, are you really coming out on top?
Like your wise older sibling, we want you to fully understand your financial situation before making a money decision. So if you’re wondering whether you should save, invest or pay off debt, let the below hypotheticals provide some food for thought.
The micro-investor with a new set of wheels
Our micro-investor discovered an app that lets him round up his daily transactions and allocate them to a predesigned portfolio. He’s not a big spender, but he makes a lot of small transactions every week – coffee and lunch every day, plus a beer or two at the pub, that sort of thing. His round ups average around $12 each week, which means he’s able to invest $624 over the year.
His micro-investment portfolio is delivering an 8.5% return – not bad! Unfortunately, the app takes a $3.50 fee each month, which gives him a real return of only $11 on his round up investment each year.
Our micro-investor friend also splashed out on a new car recently. He still owes $17,500 on the principal and pays an interest rate of 12.6%. If he’d used those round ups to pay a little extra off his car loan, he’d save $80 in the first year alone. Better than an $11 return on his micro-investment, wouldn’t you say?
Humans have a general tendency to want to see numbers grow, not shrink. So when we hear that we can make money by investing, we don’t necessarily think of the money we can save by paying off debt sooner. That’s why zooming out and looking at the entire picture is so important when making financial decisions.
The seasoned investor with a credit card conundrum
Our seasoned investor has bought and traded stocks on the ASX for several years. She does her research and has a pretty good handle on the game. Her average annual return is around 12% – more than 2% above the ASX average.
She’s always been good with money, and when she heard about credit card “points hacking”, she saw it as another way for her to get ahead. Enticed by sign-up bonuses and double points promotions, she quickly lost track of how much she was spending. Now, our savvy investor is juggling two credit cards with 16% and 19.4% interest rates.
Suddenly, her 12% investment return doesn’t look so hot. She has to sell some of her shares at a loss just to get on top of her debt.
The aspiring homeowner with a lot of memoriesand a lot of debt
Our aspiring homeowner was never too worried about saving for a property. He travelled on and off for several years and figured home ownership was something that ‘future him’ would have to deal with. Since the pandemic, he’s been living with his parents while his friends purchase their first, even second homes.
He’s working overtime to save for his deposit, but there’s one nasty bill that takes a big chunk of his earnings each pay – a $4,000 travel loan he took out to fund a previous trip. The 14.6% interest rate is taking a toll, but he’s still only repaying the minimum amount so he can focus on building up his house deposit. At this rate, he will end up paying nearly $1,000 in interest over the 3-year loan term.
He’s already put more than $6,000 aside for his house deposit. If he bit the bullet and paid off his loan in full, he’d be almost $1000 better off in the long run. It’s tough to see your savings take a hit, but when you look at the bigger picture, paying off high-interest debt is always worth considering.
Disclaimer: This article contains general information only, and is not general advice or personal advice. Wisr Services does not recommend any product or service discussed in this article. You must get your own financial, taxation, or legal advice, and understand any risks before considering whether a product or service discussed in this article may be appropriate for you. We have taken reasonable efforts to ensure that the information is accurate at the time of publishing, but the information is subject to change. We may not update the article to reflect any change.
1 Interest rate is based on retail deposit and investment rates on savings account with a balance of $10,000 averaged across five major banks. The most recent data was recorded on 30 November 2021.
2 According to the Reserve Bank of Australia’s Statement of Monetary Policy – November 2021. https://www.rba.gov.au/publications/smp/2021/nov/inflation.html
3 Rates correct as of August 2021 as reported on the Australia Securities Exchange Website, Evolution of Income Investing on ASX. https://www2.asx.com.au/blog/investor-update/2021/evolution-of-income-investing-on-asx
The scenarios provided are hypothetical and based on macroeconomic conditions at the time of publication.
Calculations and formulas
Scenario 1: Calculating the potential return on investment:
$12 x 52 = $624
$624 x 8.5% = $53.04
Scenario 2: Calculating the potential interest saved on car repayments:
$17,500 x 12.6% = $2205
$17,500 - $624 = $16,876
$16,878 x 12.6% = $2126.4
$2205 - $2126.40 = $80
Scenario 3: Calculating the interest payable on a personal travel loan:
14.6% divided by 12monthly repayments x remaining loan balance = Interest paid that month.
Total interest paid over lifetime of loan = $963.65 at 14.6% interest over 3-year term.
Amortisation calculator: https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx