Putting lazy cash to work

Given the enormous pool of cash Australians hold, you might think that we have developed a knack for managing it…but it seems the opposite is true.

10 Feb 2018

Australian households hold substantial amounts of cash, with a whopping $874 billion dollars deposited in the nation’s banks at the end of November 20171. That’s equal to more than a third of the nation’s superannuation savings sitting idly in bank accounts. Given that enormous asset pool you might think Australians have developed a knack for managing their cash…but the opposite is true. Australians are sitting on mountains of lazy cash.

Where is this lazy cash?

Much of the cash that could be working hard for households is held in transaction accounts which, almost without exception, pay an interest rate of precisely zero percent. About $58 billon1 is held in this way. Obviously, there are a range of valid reasons to hold cash in a transaction account (they are generally used as a ‘float’ to fund bills and other spending), but our analysis shows clearly that the nation is over-using these non-interest-bearing accounts. The average Australian household spends $1,4622 each week on goods and services and gets paid fortnightly (indicating they need just over $2,900 in their ‘float’) yet on average we hold $6,4333 in a transactional account not earning any interest. There is no suggestion that households should be investing this excess cash in stock markets, or in illiquid investments, but there are better ways to eke a return out of this mountain of cash. 

Another place where cash is being held sub-optimally is in low-interest savings accounts. Often these accounts offer a high interest rate for a short initial term, but it then drops down to a significantly lower rate. The other commonly seen products offer a modestly higher rate as long as savers deposit a minimum amount per month and don’t make any withdrawals. People falling foul of either rule will find themselves earning an interest rate close to zero for the month.

On average, investors in these savings accounts earn in the region of 1%5 per annum (taking into account the proportion that have passed their high interest rate period, or taken the liberty to withdraw some of their own cash). Don’t get us wrong, 1% is a whole lot better than 0%, but it is far from optimal. And Australians invest at least $214 billion6 of cash in this way.

How can Australians do better?

Failure to actively manage their cash is estimated to cost Australian households around $2.3 billion7 per year in lost interest. In the current low rate environment, this is money that savers cannot afford to leave on the table. With the innovation that is occurring in cash investment options, Australian households would do well to examine where they can make their lazy cash work harder to ensure they are not missing out on the returns they deserve.

With so much cash not working as hard as it should, it is natural to ask how Australian households can do better. Cash ETFs are an excellent vehicle for households to earn stronger returns while still meeting the requirements for liquidity and stability that cause them to hold substantial amounts of cash. For example, the UBS IQ Cash ETF currently offers steady annual yields of 1.89%. In comparison with the returns offered by transaction accounts or even savings accounts, this ETF is a clear winner.

ETFs also provide the level of liquidity that households require from their cash holdings as they can be quickly bought and sold on the ASX, just like shares. And given that the UBS IQ Cash invests only in high quality cash investments, Australians can be confident that even if the market stumbles, your cash is still accessible.

To find out more about the UBS IQ Cash ETF, call us on (02) 9324 3222 or click here to learn more.

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