Could Savings be (Nearly) Back in Vogue?

During this era of low interest rates, savings have been – to be blunt – a near waste of time. As the Official Cash Rate dropped, so did mortgage rates, deposit rates, and any incentive to have a pot of cash on hand. But has the worm begun to turn?

The labour market and prices are under an immense squeeze and, with inflation tracking up, bets are starting to be made on the OCR being hiked later this year, rather than in 2022.

Mortgage rates will follow suit, piling pressure on those who’ve saddled themselves with huge debts during the housing market boom. But savers – those often overlooked, diligent Kiwis – are set to finally get some wins.

Saving vs investing

Savings rates have plummeted in the last four years, tracking the dramatic slashing of the OCR. 

Five years ago, investing $5000 in a one-year term deposit would have earned nearly $160 when withdrawn. Those returns have now been sliced to just $48. If $5000 had been left in a term deposit over the last five years, it would now be worth a grand total of $5800. 

Compare that with investing the same amount into S&P500 over the same five years. The sum would have more than doubled: $5000 would be worth more than $11,000 now.

The differences with larger sums are eye-watering. If savers had invested $50,000 in a five-year term deposit, it would have earned just under $9,000. But had that figure been invested into the S&P500, it would now be worth $111,000.

The point is clear: savings have become near obsolete, with higher returns beckoning in even the most conservative of investments elsewhere.

Safety in savings

But for many people, particularly retired New Zealanders or those who need to be careful with their funds, savings remain important. The safety of knowing there are some funds within easy reach, earning even a tiny amount of interest, provides important comfort and stability. It’s heartening to see savings could again become a valuable part of our financial toolkits.

Analysis of average savings rates shows an early upward trend for some term deposits. For example, there has been a sharp uptick in savings rates for $5000 investments put into five-year term deposits. It is now moving toward 1.5%, around the same level as a year ago. 

It’s barely enough to bring back the hordes who are now turning to online share trading or the like to make their money work. But for those who appreciate the comfort of knowing their money isn’t going to implode, this will be welcome news.

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About the author of this page

Jose George is Country Manager for Canstar New Zealand. Jose has a strong understanding of NZ’s financial system, and a successful track record in banking and financial services. Before joining Canstar, he worked in senior positions in the cards and payments industry, at American Express and at three of the Big Four banks: ANZ, ASB and Westpac.