What Are you Going to Do with the Spare Cash?

Graeme Salt

This week’s interest rate cut from the Reserve Bank surprised no-one. For a mortgage of $500,000, it will save homeowners $110 per month – or $39,600 over the lifetime of a loan.


 


Now that you have this extra money, what are you going to do with it?


 


Economists will tell you there are three things you can do with money. You can:


• Spend it;


• Save it;


• Invest it


 


Before the GFC, Australians were spending like there was no tomorrow. Since then saving has become the new black. According to the Bureau of Statistics, households have been saving more than 10 per cent of their disposable income for quite some time, resulting in Dun & Bradstreet's Consumer Financial Stress survey concluding that we are all under less financial stress.


 


Saving is more prudent than just spending. But does it set us up for the future? Most financial planners recommend clients take a prudent approach so that they have sufficient savings to cover all of their personal expenses for at least six months. And that any specific purpose in your life that will require a large amount of cash in five years or less should be savings-driven, not investment-driven (investments can be volatile).


 


But the returns on savings are low. Once you have adequate savings, most financial planners will recommend the third thing you can do with money – invest. There are two good aspects of this week’s rate cut:


1. It puts more money in our pocket


2. It aims to stimulate the property market


There are clear signs of life in the property market. APM says the national housing market has recorded its strongest gain in more than three years and capital city dwelling values rose 1.6 per cent in July according to new figures from RP Data-Rismark. But some markets are rising more than others. Investing may well be the right thing to with the extra cash – investing wisely is clearly the right thing.