Dollar Saver tip #46
Having an emergency savings fund is important, but by keeping more than what you need in cash you could be losing out on thousands of dollars each year.
The average Australian has around $30,000 in savings and saves $717 per month, according to Finder's research.
Let's say you need $10,000 in emergency funds and could invest the remaining $20,000 into the stock market.
If you then continued to invest $500 per month, the dollar difference between an average bonus savings rate and the annual return of the stock market over 20 years is a whopping $250,000.
Did you know?
Finder's research shows the average bonus account savings rate over the last 20 years is 3.07% p.a., while the stock market returns around 9% p.a on average.
In this example, we're assuming an annual savings of $6,000 per year on top of your $20,000 deposit.
If you kept those funds in a high interest savings account for the next 20 years - assuming an average bonus savings rate of 3.07% p.a. - your total savings would amount to $202,340 and you would have earned $62,340 of interest, according to Finder's Savings Account Calculator.
That's pretty good.
But if you'd opted to invest the same amount into a stock market index fund with an average rate of 9% p.a. (all things being equal), you'd have $454,126 in total savings with $314,126 in interest earned.
In all, that's $251,786 in additional savings over 20 years, or an average of $12,589 per year.
It might be hard to believe, but it's all thanks to the magic of compound interest. As your funds build up, those rates become steadily more profitable. While in the first year you would have earned just $1,421 more, by year 20 that translates into $32,652 in additional returns!