Offset Accounts

Savings accounts are a popular way to stash my cash and earn some interest. Right now, we’re lucky to see savings rates over 5.5%, but there have been times when these accounts paid less than inflation, meaning my money's buying power was shrinking.

That’s why it's smart to look for other ways to keep my cash. Investing in the stock market can boost my wealth and buying power, but it's riskier and takes time. So, what are other ways I can get better returns on my cash?

In Australia, homeowners with loans have a nifty option called an Offset account. These are basically transaction accounts linked to a home loan that helps cut down interest expense directly.

Home loan interest is a big expense for most families. With the average Aussie home nearing $1 million, and assuming a loan of $800k at a 6% interest rate, a typical household might fork out $48k a year just in interest expense.

With an offset account, I can cut down on interest expenses instead of earning interest from a savings account. Here's how it benefits me:

• First off, home loans usually have higher interest rates than savings accounts. For example, a home loan might have a 6.5% rate, while savings accounts might offer around 4% to 5%.

• Second, the interest expense reduction from offset accounts aren't taxed, so every dollar of benefit is mine to keep. On the other hand, interest earned on savings accounts gets taxed at my marginal rate.

Let's break it down for $100k in cash:

• If I stashed it in a savings account with 5% rate, I'd earn $5k in interest income a year. But, if I'm taxed at 47%, I'd only end up with $2,650.

• If I put it in an offset account for a home loan with 6% rate, I'll cut down my interest expense by $6,000 a year. This reduction is tax-free, so I pocket the full $6,000. This makes the offset account about 2x more appealing than the savings account for me.

Remember, the perks and eligibility of using an offset account depends on personal situation and other factors. For instance, I need a home loan (and a house) to have an offset account, and not everyone has that. Plus, if my tax rate is lower, the appeal is less since I pay less tax on interest income.