OPINION: If this week left you wanting to find a safe place for your money, I don't blame you, writes Frances Cook. But the 'safe' option for your money isn't always what you think.
The Reserve Bank has hiked the Official Cash Rate upwards, the first one since May 2023.
It’s now at 2.5%, with predictions that it’ll be higher again by the end of the year.
The drum is beating that inflation, aka the cost of living, is getting too high again. And so mortgages, and debts of all kinds, become more expensive, as a way to put the brakes on the economy.
It gives a little chill breeze through the money world, at a time when employment is already difficult, groceries and petrol still pretty expensive, and the business world in general feeling a bit sorry for itself.
You could look at that and think, I want a safe place for my money, while we wait that out. But the safe place for your money might not be what you think. Because first you need to think about what you want that money to be doing for you, before you can decide what will keep it safe as it does that job.
Now money / Later money
For many of us, a simple rule of thumb is that banks accounts = safe; and shares = scary.
A simple rule of thumb, yes. But not necessarily a true one. Both can actually be risky. And both can actually be safe. What changes that is the context, and the time you have with them.
I think it makes more sense to think about now money, and later money.
Money that you’ll need now, or in the next year or so, is your now money.
If you’ll need it quickly, that often means a bank account is the safer option, and shares are the risky one. But if you’re not using it for five or ten years, it’s later money, then the bank account actually becomes risky, and shares becomes a much safer bet. You need a Later Money strategy.
And the recent OCR decision is a good demonstration of why.
Different kinds of risk
In the normal world, we say don’t be risky, and we mean things like don’t cross the road without looking both ways.
In the money world, risk usually means “volatility”. It means shares can go up in value. They can also go down. Over time, they’ve often made more money. It’s just one heck of a ride along the way. That’s why the standard advice is that shares are for long-term money, so that you have time to wait out the down times, and cash in on the good times.
But there’s another type of risk, that isn’t talked about as much.
It’s the risk that your money is worth less every year. And that risk hits the money that you keep in your bank account.
It doesn’t have the same drama to it as the sharemarket does, where it gets a screaming headline or three. It can be gradual, so gradual that people don’t even notice it happening.
The same way your nana complains about milk only costing 20 cents back in her day, that number in a cash savings account becomes worth less as the years march on. This is inflation risk, and in our current world, it’s more important to your money than ever.
The Reserve Bank thinks, and plenty of other economists agree, that inflation is about to bite your wallet again.
The cost of everything goes up, partly fuelled by the ongoing conflict in Iran, meanwhile our wages stay the same.
So your cash doesn’t stretch as far. The money in your bank account can end up being worth less every year.
But how is it that the bank account can’t help you with rising prices, but the sharemarket can?
Staying ahead of the price increases
Researchers have crunched the numbers on how much your money could earn for you, over a period of years. Not short-term blips, but the average over all the best and worst years.
Since 1928, cash (term deposits, savings accounts) has given back 3.3% per year.
Meanwhile, over the same period of time, the average return from the sharemarket is 10%.
The sharemarket is just a way to buy a piece of a business, and then share in any profits it makes.
It works because businesses, the good ones at least, can do something a bank account can’t. They can adapt.
When costs go up, companies raise their prices. When technology changes, they innovate.
When the world shifts, the ones that survive are the ones that move with it.
And that’s how the sharemarket stays ahead of the inflation problems, the growing cost of living, and rising interest rates.
Cash can’t do any of that. It just sits there, earning a certain interest rate, which is often barely above inflation.
Businesses. Land. Infrastructure. These things exist in the real world, people need them every day. They not only hold their value at times when cash doesn’t, they sometimes increase their value in the tough times.
Going Down
There was a note in the Reserve Bank’s announcement of the OCR that hasn’t had much attention, but I think will turn out to be just as important for our money, and the way we look for a safe place for it.
Our dollar is down. It got only a small mention in the briefing, but it reinforces all the other points I’m talking to you about here.
That means, for a small island nation that imports a lot of the things we buy, life is getting more expensive just because of the exchange rate. Fuel, food, consumer goods of all stripes – anything imported is more expensive, even before the Iran conflict impacts come in to play.
Neat.
However, for our exporting businesses, this is a happy time. They can get a higher price without customers complaining, because the price they sell for to those overseas customers translates into higher New Zealand dollars here.
So once again, we have regular New Zealanders facing a higher cost of living, and their money not going as far. But we have certain businesses doing ok, or even doing better, under the same conditions.
And how do we level that playing field? We invest, and get ourselves a piece of that business success.
Suddenly, the “safe” option for our money is looking a little different, isn’t it?
The information in this article is general in nature and should not be read as personal financial advice.
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