How to get the best return on your cash

 By Mike Ross

One of our first recommendations to clients, after advising them to pay off high-interest debt, is to set aside some money as an emergency fund and place it in a high-earning savings account.

Additionally, people should also set aside money for short-term specific expenses, such as a holiday, car purchase, or house maintenance. These funds can be kept in a savings account, or placed in a term deposit if they will be needed after a known period (e.g., 6 months).To secure the best interest rate on these savings, you might need to open an account with a different bank. While this process isn't particularly difficult, it can be a hurdle that prevents many people from taking action. If you prefer to keep your funds at your current bank, whether due to loyalty or convenience, there are likely options that offer a higher interest rate than your everyday transactional account.

Below, we provide a table of accounts available at major NZ banks that are worth considering for your cash savings, whether you are comfortable opening an account with another bank or want to maximise your return with your current bank.

Before opening a new account, consider the following:

1. Interest Rate: The interest rate offered shouldn’t be your only focus. A bank's credit rating is also important as it indicates the likelihood of the bank meeting its financial obligations, including repaying depositors. In our table, we've included only banks with credit ratings of A ("strong") and above.
2. PIE Account: Determine if the account available is a PIE account. PIE accounts cap your tax at 28%, making them tax-efficient for anyone earning over $48,000 and facing at least a 30% marginal tax rate. This can be particularly beneficial for those with a high tax rate of 39%, typically individuals earning over $180,000 and trusts. For example, a 39% taxpayer earning 5% interest on their cash account would see:
• Standard (non-PIE) account: After-tax return of 3.05%
• PIE account: After-tax return of 3.60%
3. Interest Conditions: Understand the conditions required to receive the interest. Many premium interest accounts have specific conditions that must be met to earn the interest. These conditions might seem simple (e.g. deposit $20 per month into the account), but they are in place because providers know many people will fail to meet them and thus receive significantly lower or no interest. Automate any conditions if possible.
4. Interest Conditions: Understand the conditions required to receive the interest. Many premium interest accounts have specific conditions that must be met to earn the interest. These conditions might seem simple (e.g., deposit $20 per month into the account), but they are in place because providers know many people will fail to meet them and thus receive significantly lower or no interest. Automate any conditions if possible.

Note the table only considers savings options that allow you to access your funds relatively quickly, excluding term deposits and notice savers. If you don’t need quick access to your cash, these accounts will likely offer higher interest rates.

The final line in the table includes a cash fund, the Kernel Cash Plus Fund, as an alternative for consideration. This fund invests in a range of short-term bonds and term deposits. It carries slightly more risk than a savings account, though the risk remains minimal. Withdrawals take longer than with a savings account, but the fund offers a significant return premium.

Rates accurate as of 30 July 2024