At 2.5 per cent, official interest rates are already at record lows, limiting the returns may investors receive from interest-bearing accounts.
It could get even worse, if the Reserve Bank cuts the official rate once again on Tuesday, as some expect it to, like AMP Chief Economist, Shane Oliver.
"The next cut, we may see one in the April meeting or the May meeting, and the reason for that is that the economy is still sub par, the outlook for business investment is very poor, inflation is low, the Aussie dollar is still too high and all of those things I think will justify another rate cut," he said.
The National Centre for Social and Economic Modelling said a 25 basis-point interest rate cut benefits those households led by 25-to-64 years olds by more than $300.
But for those over 65, it actually reduces their income by $29 a year. But that assumes interest accounts from only part of their whole income portfolio.
Shane Oliver said that if interest-bearing accounts were the only source of income, that would be bad news.
"We've seen literally a collapse in bank term-deposit rates, in fact, they're at levels that haven't been seen, since the early 1950s- so for most of us, we've never seen interest rates and bank deposit rates at these sorts of levels."
Michelle Hutchison, from finder.com.au, offered this advice for those consumers who prefer to stick with cash accounts:
- If you rely on your savings, make it work harder for you by switching to the highest interest accounts possible – there are no fees for closing accounts and opening new ones, and savings account applications are not recorded on your credit file so you can jump around as much as you like
- If you have an introductory period with a high interest rate that falls after a certain number of months, make a note in your diary before the rate falls as a reminder to compare accounts and switch
- Understand the conditions: many high interest accounts have conditions to be eligible for the bonus interest such as deposit $200 per month and make no withdrawals. This usually means if you don't do these things you will earn very little, if any, interest for that month
- Many savings accounts offer an automatic savings plan, which is a great idea to help you save money automatically on a regular basis. Link your everyday transaction account to your savings account and set up an automatic debit your savings and you won't have to think about it
- There's a big difference between savings account and term deposit rates so it's important to compare deals online on a regular basis. Some accounts have tiered interest rates depending on your balance so make sure you read the fine print
- If you have a lump sum of money you might be better suited to a term deposit. Longer term accounts generally offer better returns and they're a good idea if you think the Reserve Bank cash rate will fall
- Laddering: this is a technique to allow you to access your savings regularly and spread out your risk between different terms of term deposit accounts by splitting your savings into different portions and opening accounts with different terms.
- Don't forget to compare term deposits before the term ends, rather than allowing it to automatically rollover to a new term as this might not be the best deal in the market.
Shares are another option, and is why the Australian sharemarket is trading at a near seven-year high.
Gareth Colgan, financial adviser at Eqeus, said its recent rally had been driven by high-yeilding stocks.
"They're playing a really attractive rate of return of between six to seven per cent as a grossed up dividend yield, and that can be quite compelling for people sitting in low interest rate cash type investments," he said.
However, shares don't always rise.
Gareth Colgas said that corporate or government bonds could be more conservative, and pay a rate of interest for a fixed period of time.
"Bonds are basically when you lend to a company or government, and they will pay you a rate of interest for a fixed period of time depending on that rating of bond," he said. "If they are highly secured or less secured, ie the risk associated, will determine the risk of return they're willing to pay you. Hybrid securities on the other hand are more risky than bonds, and they have certain characteristics of shares and bonds, and they will pay you a floating rate of interest above the bank bill rate for example."
