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18 Jan 2021

Saving in a Low Interest Rate Environment

2020 was a highly challenging year, with the global pandemic and associated economic downturn threatening every aspect of modern life. Some good things have emerged, however, including government incentives and a consistently low interest rate environment. However, despite the obvious benefits of current conditions to homeowners and property buyers, making your savings work in this brave new world can be difficult. It's never been more important to diversify and think outside the box, with financial guidance delivered by experts more important than ever before.

While great for homeowners and those looking to enter the property market, low interest rates are tough when it comes to maximising your savings. Term deposits are paying less than 1% a year for terms of five years, and short-term deposits of 90 days are paying just 0.35% compared to 10-year rates of 4.39% and 2.9% respectively. This is an impossible situation for many, with virtually all short-term returns likely to be swallowed by inflation. This has a negative impact on older customers in particular, many of whom have larger amounts of money in the bank and use this income to subsidise their living costs.

According to ASB economist Chris Tennent-Brown, people with money in term deposits need professional advice now more than ever: “Term deposit rates aren’t expected to improve any time soon, and the risk is they can get even lower than they are today, as we see offshore. It’s a really tough environment for conservative investors, including retired people who have been expecting to get much higher returns from the bank than what’s available now." While sitting on your money has never produced life-changing yields, as things currently stand, you may ever pay a price for letting your money stand still.  

"Now we are stuck in a prolonged period of extremely low returns for low-risk, income-producing investments like term deposits and investment-grade bonds." said Mr Tennent-Brown, adding "We don’t think this will change in the near future, so people who are impacted need to get some good advice about where to put their money.” The current environment is already having an effect on people's investment decisions, with a survey by the Financial Markets Authority suggesting that 43% of people were less likely to invest in term deposits.

Luckily, there are other options available, including managed funds and exchange-traded funds. Even conservative KiwiSaver funds returned 4.3% in the year ending September according to research house Morningstar, and good profits have come from other unlikely sources. Lower returns do come with increased accessibility, with people able to benefit from diversification when they have access to professional advice. From self-managed stocks and shares to expert-managed funds and property assets, there are many ways to benefit in the current environment if you're prepared to think outside the box.