Deciding where to put your money in Australia can feel like a big decision. Two of the most common options are high-interest savings (HIS) accounts and exchange-traded funds (ETFs). While both can help you build your wealth, they serve very different purposes.

The right choice for you comes down to three key things: your financial goals, your timeline, and your comfort with risk. In short, HIS accounts are better for short-term goals and emergency funds, while ETFs are generally more suited for long-term wealth creation. As always, please speak to us for advice tailored to your circumstances.

Here’s a more detailed breakdown to help you determine which is right for you.

High-Interest Savings (HIS) Accounts

A HIS account is a type of bank account that pays a higher rate of interest than a standard transaction or savings account. They are designed to give your savings a modest boost while keeping your money safe and easily accessible.

When a High-Interest Savings Account is a Good Choice:

• Short-Term Goals (Under 3-5 years): If you’re saving for a goal that’s just around the corner, like a house deposit, a new car, or a big holiday, a HIS account is a sensible option. The value of your savings won’t fluctuate with market movements, so you can be confident the money will be there when you need it.

• Emergency Fund: It’s wise to have three to six months’ worth of living expenses set aside for unexpected events, such as a job loss or a medical emergency. A HIS account is the perfect home for this fund because you can get to it quickly without having to worry about selling investments at a potential loss.

• Low-Risk Tolerance: If the thought of losing money makes you anxious, the security of a HIS account is a major advantage. In Australia, the government’s Financial Claims Scheme (FCS) protects deposits up to $250,000 per person, per institution, in the unlikely event a bank fails.

Exchange-Traded Funds (ETFs)

An ETF is a type of investment that holds a collection of assets, such as shares, bonds, or commodities. When you buy a unit in an ETF, you’re buying a small piece of many different companies in a single transaction. They are bought and sold on a stock exchange, just like individual company shares.

When an Exchange-Traded Fund is a Good Choice:

• Long-Term Goals (5+ years): If your financial goals are further down the track—such as retirement or saving for your children’s education—ETFs offer the potential for much higher returns than a HIS account. Over the long term, the growth of the market has historically outpaced the interest earned in savings accounts.

• Willingness to Take on Some Risk: The value of ETFs can go up and down with the market. While this volatility can be unsettling in the short term, a diversified ETF portfolio has the potential to grow significantly over several years. It’s important to be comfortable with this level of risk and have a long enough timeframe to ride out any market downturns.

• Building Wealth: For those looking to grow their wealth over time, ETFs provide a straightforward way to invest in a broad range of assets. This diversification helps to spread risk, as you’re not putting all your eggs in one basket.

Comparing Returns: A Look at the Last 10 Years

To understand the practical difference in returns, let’s look back at how each has performed over the past decade. This comparison helps to illustrate the trade-off between the safety of savings and the growth potential of investments.

Performance of High-Interest Savings (HIS) Accounts

Over the last 10 years, interest rates on HIS accounts have been heavily influenced by the Reserve Bank of Australia’s (RBA) official cash rate. This period has been largely characterised by historically low rates.

For much of the past decade, even the most competitive HIS accounts offered rates that were often between 1% and 3%. During the period between 2020 and 2022, these rates fell to near zero. A key point to consider is inflation, which measures the rising cost of living. For a significant portion of the last 10 years, the rate of inflation has been higher than the interest rates offered on HIS accounts. This means that while your savings balance was slowly increasing, the actual purchasing power of that money was often decreasing. Your ‘real’ return (your return after inflation) was frequently negative.

Performance of Exchange-Traded Funds (ETFs)

Over the same period, an ETF tracking a broad market index like the S&P/ASX 200 (the 200 largest public companies in Australia) would have performed very differently.

Historically, a broad-market Australian shares ETF has produced an average annual return in the region of 8% to 10% over the long term. This figure includes both the growth in share prices and the dividends paid out by the companies within the fund. While this return isn’t a straight line — there are good years and bad years — the power of compounding has allowed long-term investors to build significant wealth that outpaces inflation.

A 10-Year Snapshot

To put this into perspective, let’s imagine you had $10,000 to put away 10 years ago and chose one of these two options.

• In the HIS account: Assuming an average interest rate of 2% per year, your $10,000 would have grown to approximately $12,212. However, when you factor in the average rate of inflation, the real value of your money might be less than what you started with.

• In the ASX 200 ETF: Assuming an average annual return of 9% (a typical long-term average), your $10,000 would have grown to roughly $23,670. This is a simplified example that doesn’t account for taxes or fees, but it clearly shows the potential for greater growth through investing.

A Quick Comparison

FeatureHigh-Interest Savings (HIS) AccountExchange-Traded Fund (ETF)Best ForShort-term goals, emergency fundsLong-term wealth creationRisk LevelVery LowVaries (from low to high)Potential ReturnLowerHigherAccessibilityHigh (easy to withdraw funds)High (can be sold on market days)Government GuaranteeUp to $250,000None

Conclusion

The last decade highlights a key financial principle: for money you can’t afford to lose and may need soon, the safety of a HIS account is paramount. For money you’re looking to grow over the long haul, the returns offered by investments like ETFs have been much more effective at building real wealth.

Ultimately, the best approach for you may involve a combination of both. You could use a HIS account for your immediate needs and an ETF for your long-term ambitions. Before making any decisions, it’s always a good idea to consider your personal circumstances and, if you’re unsure, please feel free to speak to us.