If you read finance news around the web, you’ll know that a lower official cash rate - like our newly struck upon benchmark of 0.10% - aims to stimulate household spending and housing investment. In other words, the lower cost of borrowing money means household wealth and cash flow should increase.
But not all rate cuts are equal. For example, if you backtrack to the GFC in 2008, the Reserve Bank cut the official rate from 7.25% down to just 3% in less than a year. This rather dramatic series of cuts is said to have helped Australia stay out of a recession back then, notably making home loans much cheaper. It’s not really certain however, how an already very low rate dropping to near-zero will shift our mindsets ... or our money. Ultimately if you need to borrow money right now, you should still do your homework.
Finding the right match
To this end, we like to consider how a product might match your specific needs at Mozo. There’s a product’s interest rate - which doesn’t always line up with the official benchmark rate - but there are also other bells and whistles to check off. For example, in our recent credit cards report we devised personas to suit different spending and saving goals. We called some people bargain hunters, noted that others like bonuses or rewards, while many of us can't stand the sight of high fees - no surprise there. Bargains, bonuses and fees are all part of the assessment and comparison process.
Of course, when the economy is in transition, there are also simple everyday questions we tend to ask ourselves, too. For instance, is it worth stashing money in a savings account right now given the tiny rates of interest? Is it perhaps cheaper to swap a credit card for a personal loan if I'm struggling with my card's fees? If I want to borrow money for a car, do I have a good enough credit history to get approved? Or, while I thought my home loan rate was pretty good, should I be doing better?
Questions we can all relate to, though our individual answers will differ. Consider that some people, like many homeowners, popped the champagne after the RBA decision. Others, such as savers, were possibly squeezing the cork back in. A few in between, might have wondered how to approach borrowing and spending money generally. It can be confusing all this.
With a holiday period on the horizon, many of us are wondering how to rate our individual money challenges. Maybe a year ago, low interest rates weren't so glaring for savers. Aussies weren't really hoarding big amounts. But according to the folks at personal finance app Pocketbook, its average user had put away around $1,200 in January but that figure jumped to $2,600 in July - the height of pandemic worries locally. Presumably it continues to climb as Christmas approaches.
So unless you're under the age of 30 and have a Westpac Life saver account with 3% interest, or are perhaps getting 1.60% with Up or maybe the 2% intro rate with Rabobank, your savings stash is unlikely to be growing much at all. For most of us, the weekly pay packet might be better placed under the bed. So, I suppose the incentive to spend money or invest it back in the economy is pretty strong and that's what the RBA wants.
What to do ...
Best of intentions
I've heard some experts say that now might be the time for savers to move their money into more risky endeavours such as shares. Low interest rates have indeed drawn many newcomers to the potentially better returns of stock markets around the globe. That might be a good call with the right advice, and yet, isn't sensible for everyone.
Here's another thought that might help then: I recently read a financial advisor's advice that the act of saving should simply be the goal sometimes. In other words, there doesn't always have to be a big profit attached. Sometimes a secure deposit product with a solid savings rate should be viewed as favourable because that money is being put aside with good intentions. Mere good intentions, you see, can be comforting, especially in very uncertain times.
Another good intention might be taking your family or friends on a holiday. Okay, for some, the funds aren’t readily there. But again, if you’ve been saving for some time, then maybe you’re in a good spot to show a lender that you know how to budget, have a good credit score and could responsibly take on a loan for a holiday, or even a car for a road trip. At least this type of thinking, no matter what the economy is doing, might turn a year of tough number crunching into tangible positives.
Read our latest Banking Round-up for the key figures across all banking products.