How should you invest your cash savings?

Often people wonder whether they should be doing more with their cash savings other than leaving them in a savings account. This blog discusses some options and highlights some considerations with each option. 

Of course, the information contained in this blog is not personalised advice as it cannot consider your unique situation and goals. As such, you should always consider obtaining personal independent financial advice before making any financial decisions. 

Maintain a buffer equal to 6 to 12 months of living expenses

I typically counsel my clients to hold between 6 and 12 months of living expenses in cash savings in case of emergencies. If your income or expenses can be volatile, you should probably hold 12 (or more) months. 

Therefore, the options discussed below apply to any cash savings you may hold in excess of this buffer amount. 

Contribute into super

You can contribute savings into super either through making concessional (up to an annual cap of $27,500 per person) and/or non-concessional (annual cap is $110,000) contributions. 

The benefits of moving savings inside super are twofold. Firstly, it’s a low-tax environment where investment earnings are taxed at a flat rate of 15% and capital gains at only 10%. If you are a high-income earner, it will save tax. Secondly, it will be automatically invested for you in line with your selected investment option e.g., balanced, growth, etc., so it’s a very simple, hands-off way to invest your savings. 

The downside to contributing money into super is that you cannot access it until you are older than 60[1] and retired (or 65 if you are still working). Whether this is a potential problem depends on (1) how close you are to being able to access super if you need it and (2) the likelihood of needing to access these monies e.g., if you have plenty of financial resources outside of super, then the likelihood is probably low.   

If you are going to move your savings into super, please make sure that your super fund is performing well. 

Invest in hybrid securities 

A hybrid security is a type of investment that combines bond and share (equity) characteristics. It usually pays a monthly income, like a bond (via a dividend payment). These dividends typically have imputation (franking/tax) credits attached to them, like a share. They will be issued for a fixed term i.e.; they mature like a bond. Subject to certain trigger events, hybrid securities can convert into ordinary shares e.g., bank hybrids will convert into shares if liquidity ratios fall below a certain level. 

Rarely are two hybrid instruments the same – they all have unique and complex terms. Therefore, I don’t invest in these instruments directly. 

You can mitigate many of these risks and the associated complexity by investing in a managed fund that manages a portfolio of hybrid equities. This will provide you with diversification and the manager will price-in/analyse any conversion risks, thereby minimising your investment risks

We often use BetaShares Active Australian Hybrids Fund (HBRD) to invest client’s monies. It has paid a monthly yield (income) of 5.19% p.a. over the past 12 months (including imputation credits i.e., that is a pre-tax return). This yield is indirectly linked to the RBA’s cash rate. It is important to highlight that the capital value of this fund can vary, but often by only 1% to 2%. However, over longer periods of time, it is reasonable to expect the capital val