In uncertain times, accumulating cash feels responsible. Bills are rising, markets are unpredictable, and having money in the bank provides a sense of control. For many Australians, building up a cash buffer has become the default financial strategy. And on the surface, it seems like prudent planning.
But here’s the thing. Is your cash actually working for you, or is it quietly falling behind?
The reality is that holding too much cash over the medium to long term carries its own form of risk. With inflation still elevated, every dollar sitting idle in a savings account may be losing ground in purchasing power, even if the dollar amount stays the same.
At Wealth Fundamentals, we’ve coached our clients through wealth management through times of uncertainty, and it’s rare we recommend a pause on investing. Here’s why.
The Inflation Problem: Why “Safe” Cash Isn’t Always Safe
Inflation is the quiet force that reduces the purchasing power of your money over time. When inflation runs at around 4%, a savings account returning a similar rate offers little more than a holding pattern. So essentially your wealth is treading water rather than growing.
This is the opportunity cost of excessive cash holdings. Unlike market risk, which is visible and immediate, the cost of being too conservative compounds silently in the background. Over five or ten years, the difference between deploying capital effectively and leaving it in savings can be substantial.
The goal is not to eliminate cash entirely. A well-structured financial plan always includes an appropriate cash reserve for short-term needs, emergencies, and liquidity. The question is: how much is enough, and what should happen to the rest?
Ways to Put Your Cash to Work
When surplus cash sits beyond your emergency buffer and short-term goals, there are meaningful alternatives to consider. Each carries a different risk and return profile, and each interacts with your individual tax position in a distinct way.
The table below illustrates how $10,000 of pre-tax income could perform across each option, using a 32% marginal tax rate (including Medicare levy) as the base case. The ATO concessional tax rate for superannuation contributions is 15% (source).
| Savings | Offset / Loan Repayment | Investment | Super | Account Based Pension | |
|---|---|---|---|---|---|
| Sum (pre-tax) | $10,000 | $10,000 | $10,000 | $10,000 | $10,000 |
| Effective tax rate | 32% | 32% | 32% | 15% | 15% |
| After tax | $6,800 | $6,800 | $6,800 | $8,500 | $8,500 |
| Earnings rate | 4.50% | 5.50% | 8.00% | 8.00% | 8.00% |
| Return | $306 | $374 | $544 | $680 | $680 |
| Tax on earnings | 32% | 0% | 32% | 15% | 0% |
| Final benefit | $208 | $374 | $370 | $578 | $680 |
| Compared to cash | n/a | +79.7% | +77.8% | +177.8% | +226.8% |
Assumptions: 32% marginal tax rate (incl. Medicare levy); 15% super tax rate; 5.5% interest rate; 8% investment return. No assumption for dividend franking or CGT discount — these would further improve the investment and super outcomes. General illustration only — not personal advice.
1. Paying Down Non-Deductible Debt or Using an Offset Account
Directing surplus cash toward a mortgage offset account or non-deductible debt repayment offers a predicatable after-tax return equal to your interest rate, with no market exposure. For most Australians, this represents a compelling, low-risk way to deploy cash.
In the example above, an offset account delivering a 5.50% return produces a final benefit of $374. That’s nearly 80% more than the savings account outcome. The key advantage is that the return is both certain and tax-free, since you are reducing interest rather than earning taxable income.
2. Investing Outside Superannuation
Investing in a diversified portfolio (whether through managed funds, shares, or other vehicles) offers the potential for returns above inflation over the medium to long term. However, earnings generated outside superannuation are taxed at your marginal rate, which reduces the net outcome compared to the gross return.
At a 32% marginal rate, a portfolio earning 8.00% produces a final benefit of approximately $370 in the above example. Meaningfully more than cash, but modestly less than the offset.
At higher income brackets (39% or 47% marginal rates including Medicare levy), the gap between investing outside super and other alternatives widens further.
The benefit of this strategy is liquidity and accessibility, as funds remain available for other financial priorities.
3. Contributing to Superannuation
For eligible Australians, directing additional funds into superannuation, particularly through concessional (pre-tax) contributions, can be a highly tax-effective strategy. The concessional tax rate of 15% on contributions means that more of each dollar enters the investment environment, and earnings are also taxed at 15% rather than at the marginal rate. It is worth noting that for those earning above $250,000, Division 293 tax applies, which brings the effective tax rate on contributions to 30%. Even so, this remains considerably more favourable than the top personal marginal tax rate of 47%.
In the example above, super produces a final benefit of $578 that’s nearly 178% more than cash. In the account-based pension phase, where no tax is payable on earnings, that figure rises to $680. These outcomes improve further when dividend franking credits and CGT discount are considered.
The trade-off is accessibility: superannuation is generally inaccessible until preservation age.
The Right Balance Is Personal
It is important to note that none of these options is universally superior. The right approach depends on a range of individual factors, including:
- Your current marginal tax rate (32%, 39%, or 47%, inclusive of the 2% Medicare Levy) – see ATO individual income tax rates
- The level and type of debt you hold
- Your age, time horizon, and superannuation balance
- Your income stability and liquidity needs
- Your broader financial goals and risk tolerance
A cash flow review often surfaces other opportunities too. Insurance premiums, for example, are a recurring cost that many Australians haven’t revisited in years. Restructuring cover, rather than simply removing it, can sometimes free up cash to deploy more effectively, without reducing the protection you actually need.
At higher income brackets, the advantage of superannuation contributions and debt repayment over cash and investment outside super becomes even more pronounced. Conversely, someone with limited non-deductible debt and a lower tax rate may find that a combination of investment and modest super contributions best suits their circumstances.
The key principle is this: holding cash is not inherently wrong. Holding too much of it, for too long, without a plan, often is.
Don’t Let Caution Become Complacency
In a high cost-of-living environment, the instinct to hold cash is understandable. But left unreviewed, that instinct can quietly work against your financial independence.
The numbers make the case plainly: compared to a basic savings account, directing surplus funds toward an offset account, a diversified investment, or superannuation can produce meaningfully different outcomes over time that compound year after year.
The goal is not to take on unnecessary risk. It is to find the right balance between security and growth, guided by a systematic plan that considers your whole financial picture.
Ready to review how your cash is working for you? Speak with Matt Lane or Alec Winter to explore the options available and find the right plan for your individual circumstances.
Frequently Asked Questions (FAQ)
Q: How much cash should I keep as an emergency fund?
A: A general rule of thumb is three to six months of living expenses held in an accessible account. Beyond this, surplus cash may be better deployed elsewhere depending on your individual circumstances. The right amount varies based on your income stability, debt level, and overall financial position. This is a factor worth reviewing with a financial adviser.
Q: Is it ever a good idea to hold more cash than usual?
A: Yes. There are situations where holding higher cash reserves makes sense, such as when you are saving for a specific short-term goal, anticipating a major expense, or approaching a significant life transition like retirement. The key is intention: cash held for a defined purpose is very different from cash sitting idle without a plan.
Q: What is an offset account and how does it differ from a savings account?
A: An offset account is a transaction account linked to your home loan. The balance in the offset account reduces the loan principal on which interest is calculated, effectively earning you a return equal to your mortgage interest rate that is tax-free, since you are reducing a cost rather than earning income. A standard savings account earns interest that is taxed at your marginal rate, making the offset generally more efficient for those with a home loan.
Q: What are concessional contributions to superannuation?
A: Concessional contributions are pre-tax contributions made to your superannuation fund — including employer contributions and voluntary salary sacrifice arrangements. They are taxed at 15% within the fund, which is typically lower than most individuals’ marginal tax rates. Annual concessional contribution caps apply, so it is important to understand your limits before proceeding. Speak with a financial adviser or refer to the ATO for current figures.
Q: Does my tax rate really make that much difference to the outcome?
A: Yes — significantly. As the table in this article illustrates, the advantage of superannuation and debt repayment over cash savings becomes more pronounced at higher marginal tax rates (39% and 47% including Medicare levy). For higher income earners in particular, the tax environment in which returns are generated has a major impact on net outcomes over time.
Q: Should I reduce my insurance to free up cash?
A: Insurance premiums should be reviewed carefully rather than simply reduced. In a cost-of-living environment, it is tempting to cut what feels like an unnecessary expense, but insurance plays a critical role in protecting your financial security. A review may reveal opportunities to restructure cover more efficiently, but removing or reducing protection without professional guidance carries risk. Always seek advice before making changes to your insurance arrangements.
Q: Where do I start if I want to review how my cash is being used?
A: The best starting point is a conversation with a financial adviser who can assess your full financial picture — income, debt, superannuation, investment, and insurance — and help you identify the most appropriate strategy for your circumstances. At Wealth Fundamentals, our 7 Fundamentals framework provides a structured way to review each of these areas holistically.
Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. The information contained within this document does not consider your personal circumstances and is of a general nature only – unless otherwise stated. Wealth Fundamentals strongly suggests that you should not act on it without first obtaining professional advice specific to your circumstances. This information is based on our understanding of legislation at the time of writing. Such legislation may be subject to change. This publication cannot be reproduced in any form without the express written consent of the author.
