She's On The Money - Investing 101: Cash me outside (how bout dat)

Episode Date: January 19, 2021

Welcome back for another deep dive Wednesday. Today we're talking all things cash cash money and why it's an investment asset. The most interesting thing about this ep is arguably the title, but I'm sure as a SOTM OG listener you'll go ahead and listen anyway.Joining you for this week's deep dive you’ve got Victoria Devine, Georgia King (The OG's, the Originals, and according to them - the best!)Do you love the podcast SICK and want more SOTM? Course ya do. Join our Facebook page to share your money wins and money confessions, follow us on Insta for daily inspo to keep you on track and DEFINITELY subscribe to our newsletter, the written recap of the pod's key takeaways, including some bonus bits you won't want to miss.Finally, if you're in a money mess and need help untangling the muddle - we've got you sorted - simply record your question and send it through to us at [e-mail] and you may just end up on the podcast!The advice shared on She’s on The Money is general in nature and does not consider your individual circumstances. She’s on The Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Victoria Devine is an Authorised Representative of Australia Pacific Funds Management Proprietary Limited ABN 34 132 463 257 - AFSL 339151.See omnystudio.com/listener for privacy information.

She's on the money. She's on the money. Hello and welcome to She's on the Money, the podcast for millennials who want financial freedom. On today's show, we are going to be deep diving into all things cash, which was one of our four investment methods that we spoke about briefly last week. And by the end of today's show we promise you'll know who cash is an appropriate investment for who it certainly is not appropriate for plus what its benefits and limitations are and just for a little added sauce to top it all off I do like sauce you like that I don't like the name Vicky D but I do like

sauce well you will be answering questions about cash from the community members Carly and Kate which should be a bit of wholesome informative fun which we all could agree is the best kind of fun. Now, if you don't already know who I am, my name is Georgia King. I am a journalism student and a copywriter. Oh, wow. Fancy. And as always, I'm joined by millennial money wizard, Vicky D, Victoria Devine. How are you? Hello. I'm well. It'd be better if you stopped calling me Vicky D, but that is all good. How about in our deep dive episode, we literally just deep dive straight in. Should we? Absolutely. What is your first question? Okay. So V, what does cash mean when we're talking about investment? Cash, cash money. So cash investments, they actually

include all of the money that's currently sitting in your bank account, in everyday savings accounts, in your term deposits, if you've got them, which honestly, this type of investment, and we call it an investment because it is one. I know people are like, oh, I'm not investing. It's kind of like, well, you kind of are if you're saving and putting money away for a future purpose, right? It's incredibly low risk and they actually have the benefit of potentially providing a pretty stable yet very minimal income in interest in the future and I know last year we were really talking about especially at the start of the year about which savings accounts to go with I don't know a lot of savings accounts had like two and a half percent you guys are really excited about it

and then there was all of this talk in our community about how the interest rate was going down and how disappointing it was but it was actually just a sign of the times and what was going on and that's actually what happens and these things actually cyclical which means they go around and, you know, things go up and things go down and things change. And I think that that's really important to take into consideration. A lot of people probably don't even think about money that they have in their bank accounts, though, as an investment or term deposits as an investment. But they absolutely are. And even compared to other investment types like the share market and the property market, cash, whilst it does offer a pretty low return, with low return

comes low levels of risk, friends. And we'll actually do an episode on risk profiling because one thing it's really pervy like if you guys like to know what your Myers-Briggs personality type is let me introduce you that your financial type yeah yeah yeah maybe I can find a really fun way of like phrasing it yeah yeah we'll work on that I'm gonna work on that I'm gonna make us a survey and then at the end of the survey it'll tell you who you are brilliant genius love it okay so B are these things investments because you potentially earn a return from the interest is that how it works that's why yes absolutely and at the end of the day why are you shopping around for a different interest rate on your high interest savings account if you're not trying to

make your money make money and these things really change like I remember way back when I was in high school having a savings account that had like nine and a half percent like it was a term deposit like what can you imagine if someone guaranteed that if you put your money into a super safe environment in a term deposit, just didn't touch it, you get nearly 10% return. Like that is wild. That is wild. But that brings me to my next question here. What is a term deposit? Because people are probably listening and thinking, I don't know what they're talking about. So talk to us. A term deposit is going to see your money locked away for a fixed period of time. So different term deposits have different periods of time. It could be three months, it could be six

months, it could be 12 months. Some even have 24 month periods. And in return, you'll receive a fixed interest rate that is generally at a much higher rate than you get from just a regular savings account. So this is generally for a longer term and the longer the term, usually the higher the interest rate. There are a few negatives. The main benefits are obviously high interest. Yeah, that's much better. Guaranteed income, again, fantastic. It won't ever change even if official interest rates change, which I think is really great. I know a couple of my clients have got term deposits. Because at the end of the day, like I might talk about investment all the time and you guys know I adore the share market. Like it is something I'm so crazy about. But if a client

has a really low risk profile, I'm not going to go put all their money in the share market. Like I do have clients that invest this way because it makes sense for them. And I think that's really important to put out there because I don't actually want you guys to think that the only way is the share market. Yes, it is. You get higher returns, but with higher returns come higher risk and some people are just not willing to take that risk. So it's really worth remembering too that with term deposits, if you need to access those funds and you have a term deposit, you actually will lose any of the accumulated interest you earn on it if you access it early and you might actually even have to pay fees. So there could be a sting if you need to get it back

for any reason. And just to clarify as well, term deposits are within your bank account. They're not on the ASX. Oh, absolutely not. So a term deposit is usually with a bank. So you might have a term deposit with a different bank than what you usually bank with. All of the big four banks have term deposits at the moment. I mean, they're not that flash or crash hot, but that is the current state of the world, my friends. And okay, this is a fun little tidbit. I realized that I actually have a term deposit. Georgia King. I know, I know. I'm actually savvy. Oh, you actually have an accidental term deposit, so we're out of you. I've had it for like three years and it has earned me quite a decent little return, but I didn't realize that you get taxed on it. That's

a thing. Yeah, you do, you do. And that is so important to take into consideration. And I had this rant yesterday, actually, when we were putting together this script, I was talking to Ryan about it. And I said, what people don't take into consideration is interest on a savings account, whether that is a term deposit or your regular high interest savings account interest is income yeah and income is taxed at your marginal tax rate so what you actually need to work out is your real rate of return so that would be what is the interest rate after my tax is deducted and the quick maths in my head is not working right now so i do apologize but let's say that you had an interest rate of like two and a half percent it doesn't exist right now good luck

friends but you had an interest rate of two and a half percent but you're at the highest marginal tax bracket and you're paying nearly 40 cents in the dollar for tax like you need to take that into consideration when you're actually going oh great two and a half percent is fantastic it's higher than inflation but once you take out that 40 cents you're actually only making 60 percent of that 2.5 percent return and uh yeah friend you actually drop below inflation right so that's the same with like every kind of investment yeah absolutely like if you make a profit you need to pay tax on it when it comes to things like shares and obviously have a whole episode coming up on this you don't have to pay a tax on your you know you'll have to pay tax on your earnings

but on capital growth so the growth in value of the asset unless you sell it or dispose of it okay so many questions there we'll move along though we'll save that for our share episode so who would you say this form of investing is appropriate for? So as I said on the overview episode of this like little mini series, we probably could have come up with a sassier name. Like we could have come up with like the SOTM investment series or something. Like I'm not cool. Like I'm just doing a few podcasts on the shares guys. Just a gal. Just a gal talking about money. What a surprise in 2021 given I did it all last year. Anyway, so cash is a really defensive form of investing. And we spoke about on the episode, it being defensive and it's best for people who have

goals in place for their money that are really hoping to achieve those goals over the next couple of years. So we're not talking like 10 years in the future. We're talking about maybe you've already saved $50,000 towards your house deposit and you're planning on buying in the next two years. Like I would not be putting that money into the share market. It's just too risky. Like what if the share market crashes and then you can't achieve your goal? Like that's, that's silly talk. We don't do that. She's on money. We invest wisely and we actually understand all our asset classes so we know when to use them. So if you're thinking of buying property like probably unwise but it's also a really good temporary option for your money while you're

making bigger plans. So at the same time it would be very naive of me to assume that everybody's ready to put money into the share market or different types of assets or you know they actually have the capacity to do that. So it's a really great place for your money to live, earn a little bit of interest, hopefully try and keep up with inflation and make sure that you're not losing anything so it yields a greater return it's also a form of investing that once you actually like let's talk about retirement for a second once you get really far down the track and you know we have invested over the long term and you know you've got this like let's say you've got a two million dollar portfolio like you might want to transfer a lot of your share portfolio

into a more defensive asset because there's going to be less fluctuation yes you're going to get a lower return, but like I would much prefer a lower guaranteed, not guaranteed, but close to guaranteed return on a very large sum of money than risking being in the share market during retirement and maybe not having income one year. So I think it's really important to understand that there are different phases of your life where these assets are going to feature more heavily or less heavily, depending on what you're up to. And you don't want it locked away either somewhere else if you are going to need it. Absolutely. In the next couple of years. Okay. So many people I know can get trapped into thinking that having your money safely tucked

away into a savings account is, it's good, it's safe, there's low risk, like you'll get a little bit of interest over the journey. But can you please explain the flaws in this line of thinking? Because I can't be the only one. No, you can't be. And I know you're not. So it was a really great placed question for you to ask because it's half our community. Exactly. More than half our community, I would argue. What we don't think about when we do go off on that tangent of thinking is about inflation. so I wanted to ask you a little bit about how that plays into the decisions we should be making when it comes to our money so let's just quickly backtrack and talk about what inflation actually

is Georgia because I think it gets spoken about in passing a lot and people just go yeah inflation happens to stuff over time but like what does that really mean so at the end of the day like let's say it was to the year 2000 and the movie ticket like I remember going to the movies when I was young and it was like maybe like $6.50 for a movie ticket and now by like 2020 I go to the cinema and the movie ticket's like $22 or something redonkulous I don't understand that but you know I'm still paying because I like going to movies but that's that's the work of inflation that is a price increase over time to match demand and salaries and you know the expectations of the world at this time it is not you know the cinema's taking advantage of us it's them going oh my gosh

for us to actually provide this service to people we are going to have to increase our expenses because the popcorn is yeah exactly like maybe they're sourcing it in australia finally or like whatever they're doing everything is more expensive and salaries have slightly increased so they need to make up for it so like whether it's the price of a movie ticket a house or like a semester at uni or whatever it is these costs rise over time and sometimes these costs rise really quickly so like that example is quite dramatic but like sometimes they're really slow like it might be something that you know it might be a couple of cents every year and it's not as dramatic as the movie ticket example for example like why are mcdonald's cones not 20

cents anymore are they still 50 cents no mate i think they're like two dollars oh maccas i don't know what it is they've let me down georgia i can't eat soft serve but i also can't eat the waffle cone, but it's not the point. I just feel like I should have access to a 20 cent coin. For sure. Like I should be able to ask my dad for 20 cents to get a coin. So you're putting that down to inflation. Yeah, I'm putting that down to inflation. Absolutely. But I think you get my point. Price increases over time.

Sorry to jump in there, V. Does that increase over time always? Or like if we're in a recession, does that go down? Like what is the pattern? It can increase and decrease, but at the end of the day, it's always increasing. At the end of the day inflation happens over time. And each year, depending on what has happened in that year, the rate of inflation might change. So last year, I know that the rate of inflation was 1.8 and previous years, it was really similar. I wouldn't be surprised if it changed in the next 12 months based on the fact that we've had a global pandemic. But at the end of the day, these things work in really weird ways. You can only ever calculate it retrospectively. So you can't

calculate it into the future because we can't predict the future, but we can look at what has happened and like how much has the cost of goods and services increased over the last 12 months and that's how we kind of put a number on it so like at the end of the day you're not here for an inflation lecture are we gonna be sick lecture at a uni or something i've had so much fun but can you imagine me being given a captive audience and a whiteboard for two whole hours mate oh you guys would be sucked in oh i think so i think maybe party in your hands with all your little sayings at the end of the day. You wait until I'm in my late seventies and I'm like that little old grandma who's teaching finance at the local RMIT. Like that'll be me. That's my life goal. Anyway,

how does this actually shrink your savings? Like that's all you guys care about. So let's say you have a hundred dollars in your savings account that pays like, let's call it 1% interest rate because it's 2021. And after a year, you then have $101 in your account. But if the rate of inflation is actually running at 2%, for example, you'd actually need $102 in your bank account to have the same buying power you started with. So buying power is your ability to purchase the same item with the same amount of money. So like obviously if inflation has increased and the cost of goods have increased, you are now in a position where you can buy less. Does that make sense? So you've gained a dollar but you've lost some buying power so anytime your savings don't grow at the

same rate as inflation you're effectively losing money and that's the summary of my story okay and so how does that play into the cash side of things are you saying that we shouldn't just leave our money in our bank accounts earning little interest because it won't be able to keep up with the rates of inflation well if we want to pull out another victoria divine saying from little things big things grow. And the same happens with inflation. So like you might go, Victoria, like my money's still safe in that savings account. It's fine. I might need $102, but like that's not that much difference from $101. But over time, if that's your retirement plan, you're literally going to be retiring with less money than what you've saved. And that is a really bad plan. And it

is not in this day and age sustainable. And I think that there is, and I'm very opinionated about this because we as millennials and Gen X and Ys and whatever we are now, I don't know what the next generation after that is, we are at a deficit because historically people were able to save and that would have been enough. It is now no longer enough and our futures are going to suffer because we think that saving is going to get us to the place that we need to get at. And you look at it and you go, okay, cool. And I've used this example a million times and I use it so that it is drummed into you guys. That's why I don't give fresh new content on this. You save $500 each and every single month as a 20-year-old.

By the time that you retire, you will have a $1.2 million investment portfolio, but you would have only saved $240,000. That's what it would have. That's the difference. Like you're getting nearly a million dollars for free for investing. I mean, that's summarizing it really simply, but I think it's the most impactful way to do it. like you're choosing to not put your future self first by not investing in an asset that actually

gives you good returns whereas if we go back to that example if you're losing a dollar each year off your 240 000 and then the cost of goods in 40 years when we retire is so much more like you aren't going to be able to afford to live i'm sorry that's just the way it is wow okay well i think you've sold shares there and you will continue no not shares other investment other True investment assets. Okay. And we will get to those in our future episodes. And before we do, move on to more cash-related questions

because I do have a few more for you, Bea. I'm coming at them. It is time for a quick word from the sponsors of today's show. Okay, now, if you are new to the podcast, please remember to check out our incredible Facebook group, if I do say so myself. I mean, Georgia, we're biased. Oh, we're a little biased.

It is our Facebook group. And we do think that everybody in that Facebook group is my friend. Kind of amazing. There are a simple 126,000-ish people in there. That's how many friends I have, guys. Anyway, the point is that we continue these conversations in the group. We've also got TikTok. We've got YouTube.

We've got Instagram. It's not just the podcast. I've gotten back on TikTok in 2021 and I'm starting to create some new, fresh content for you guys. Big plans. I mean, not great plans. They are just TikToks, but I feel savvy. So we are running out of time here, Vee, but I wanted to quickly squeeze in our questions from the Facebook group. So the first one is from Kate, who asked, is it better to have cash

sitting in an offset account or a high interest savings account? I don't know what an offset account is. So maybe start by explaining that. Okay. So great question. And I actually get this a lot. To me, summary of this question is use your offset. It's a no brainer because right now your offset account is usually going to have a better return than your high interest savings account. And I will tell you why. Georgia King, an offset account is a transaction account that is actually linked to your home loan. So this is only going to work if you actually own property already. If you don't just tune out for the next couple of seconds, I do a stretch, I don't know. But essentially you can use this account in exactly the same way you would a bank account,

but any money that is sitting in your offset account right now is going to offset the amount of interest that you're paying on your mortgage. So if your high interest savings account right now is paying 1.25, but your mortgage is sitting at 3%, you're arguably getting a better return having the money offset that 3% you would have paid on cash into your mortgage. Does that make sense? So to give you a little bit more insight, because I love examples, let's say you take out $400,000 home loan, Georgia, and then you deposit 10 grand into your offset account. So instead of having $10,000 in savings, you've now got it in an offset account, still savings, you've still got the same level of accessibility to it. It is still just as safe. So now what's going to happen is

you're going to be charged interest on $390,000 instead of the $400,000. This happens for as long as you've got that 10 grand just sitting in there. But what does that actually mean for you? So with that $400,000, like let's just make it a bigger number. So it seems more impactful because that's the way we work around here. The interest rate sitting at 5% and like that loan term is for 30 years, which is standard mortgage terms. And you keep that 10 grand in your offset for that entire period of time. I mean, I'd hope you'd save more. You actually end up saving more than $30,000 in interest. And that's more than your 1.25 on your high interest savings account. And because it's on a loan, you don't have to pay marginal tax on what you make from it. Oh my God. So much to learn

here. Exactly. So if you've got an offset account, use it. If you don't have an offset account, Why don't you have an offset account on your mortgage if you're a homeowner? Is there a cap on it? Some do have caps on it in what you can like use and do it. You need to actually read the PDS of your product. And do you know what? There are some mortgages that don't allow for offset accounts. If you're going to get an offset account or you're thinking, Victoria, this actually

sounds great. Why am I not using it? Talk to your mortgage broker and say that I really want an offset facility on my mortgage because some home loans, like I'm just going to call one out here, Athena Home Loans, they're really popular right now. I actually get so, so, so many messages about Athena and how they work and like, oh my gosh, Victoria, they've got such a low interest rate and I don't have anything to do with them. I'm not sponsored by them. Like this is definitely not me promoting them. I'm just using it as an

example. They are a really low interest mortgage product, but they have absolutely no bells and whistles and no ability to have an offset. And there's like a whole, a whole range of things that I didn't personally want in my mortgage. So I didn't go with them. And I'm not saying that they're bad by any stretch of the imagination, like if you're just after a mortgage that is no fuss, no frills, then sure. But you need to understand that with super, super low interest rates often comes less ability to be flexible and actually less bells and whistles. And I know that that term probably makes it sound like shiny things you don't need, but like a bell and whistle that I would argue is really helpful for you is something like an offset account if it works for your

personal situation. Okay. I think that is going to be very helpful for our friend, Kate. Offset account sounds like the way to go. The next question, it's from the gorgeous Carly, Kate and Carly, which actually, so this is kind of what we covered before, but let's go over it again. What are the tax implications and things to be aware of when it comes to cash as an investment? To summarize, cash as an investment, you're just going to have to pay tax on whatever interest you earn from that. You shouldn't be paying any additional tax on just having money in the bank though. Like just because it's sitting there doesn't mean you pay tax. You already paid tax on it when it went into your bank account. So you're not going to be double taxed or anything

by having a heap of money in your account, but you will be paid taxed on the interest that is earned. So back to our example, if you have a hundred dollars in your bank account and over one year you earn $1 in interest. So therefore at the start of next year, you've got $101 in that account you would be charged tax on that one dollar so if you're sitting at the marginal tax rate instead of a dollar you made like let's call it close to 60 cents instead of the full dollar okay so last question to wrap here v if there was one thing people could take away from today's episode what would it be that potentially cash is not a good long-term investment it is great for short term it is great when you get to the point where you actually have a whole heap of

capital or cash that you want to sustain and not have it grow but you're just looking for a really low return, then sure. But I think that if we are trying to achieve the same outcomes in terms of investment returns that our parents had when they were able to have, you know, savings accounts that returned 15% or nine and a half percent, like I was talking about before, like it's just not available to us. And it won't be for a very, very, very long time. Like I know that banks are even looking at reverse engineering mortgages at the moment. So they will potentially in the future talk to you about paying you to have the mortgage. Like that's a whole other episode we'll get to, but literally crazy talk.

I don't see us getting high interest savings accounts at that level. All righty guys. Arguably again. You heard it here first. Cash is not necessarily king, but you are. It's king short term.

I am Georgia king. Well said. Okay, so to keep this conversation going, guys, we will be posting a little episode thread in our Facebook group. So if you do still have questions after today's episode, simply slap them in there and we'll keep this conversation flowing.

Now also next week on the show, we will be getting to the bottom of fixed interest, which we know you guys also have lots of questions about. So we will see you then. See you then, friends. It doesn't sound that sexy, does it? I'm not going to lie. Like, oh, let's talk about fixed interest, guys. But like, you're here. I appreciate you. Thank you for holding out on me. But just before we wrap all of this up, we'd love to acknowledge and pay respect to Australians, Aboriginal and Torres Strait Islander peoples, the traditional custodians of the lands, the waterways and the skies all across australia we thank you for caring and for sharing on the land on which we are able to learn

we pay our respects to elders past and present and we share our friendship and our kindness and please remember everyone that the advice shared on she is on the money is general in nature and does not consider your individual circumstances she is on the money exists purely for educational purposes and should not be relied upon to make an investment or a financial decision and we promise victoria divine is an authorized representative of australia pacific funds Management, Proprietary Limited, ABN 34132463257, AFSL 339151. And how was the pause there? A big thank you to Ryan, John and Beck.

What's Beck's last name? Beck Lewis. Beck Lewis. It's a beautiful name, isn't it? The little angel. Big thanks to those two for putting it together and to the gorgeous Jess Ricci, our community manager and all-round organisational queen. Jessica Ricci is what I've been told to call you.

Yeah, Ricci. She's very Italian. I love it. Before you do head off, friends, sorry for lagging this all out. Thanks for sticking with us. We just so love it. If you're not already in our Facebook group, join us. If you're sick of hearing about the Facebook group, great.

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We're at She's On The Money AUS. Don't forget to rate, review, subscribe, leave nice feedback, Talk about my eyebrows. Five stars. Love y'all. See you next week. Bye, guys.