“I have a small surplus of cash each week, after my outgoings, enough to save about $250 weekly. I currently have just over the recommended emergency amount in a high-interest savings account. Is it worthwhile using this surplus for wealth creation or am I best to focus on growing my savings?"
- Question from Brock in Charlestown, NSW
Top answer provided by:
Dishna Wijenayake
Hi Brock,
A high-interest savings account can be a safer option than investing money in growth assets such as shares. However, whether you should continue to invest this surplus in a high-interest savings account or invest in another investment would depend on your personal circumstances. I have listed a few things to consider below.
Would you need to access these funds within the next few years?
If you think you will need the money in the short term (less than two years or so), avoid investing it because of the additional risk you take on by putting your money in the market. A high-interest savings account would offer more security.
Do you have any high-interest debt?
If you have any high-interest debt such as credit cards and personal loans, it is best to direct these funds towards reducing these debts. Paying these off provides a guaranteed return because you are reducing future interest expenses.
Do you have any non-deductible debt?
If you are closer to the retirement age and have a large debt on your principal residence, you should consider using this surplus to reduce this debt.
Are you able to keep these funds invested for a longer period?
If you are happy to invest these funds for a period of at least 5-7 years or longer, then investing these funds in growth assets (such as managed funds, shares, exchange-traded funds etc) would likely give you a higher return. However, the risk associated with growth assets is much higher than a high-interest savings account. Therefore, if you are investing these funds in growth assets, you would have to be comfortable with market volatility.
To summarise, if you are prepared to invest these funds for a longer period and have no high-interest debt to pay off, investing these funds in growth assets would assist your wealth creation journey. However, these growth assets (managed funds, shares, exchange-traded funds, property, etc.) carry a much higher risk than a high-interest account. You would also need to be comfortable with market volatility. I recommend speaking to a financial adviser to discuss your personal circumstance, to determine the most suitable option/s.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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