The cost of our fears

Personal Finance / analysis

Our 'excess' savings held in low- or no-interest accounts is keeping us liquid at a considerable cost, one we seem prepared to pay in case emergencies befall us

22nd Mar 22, 9:40am by David Chaston

We have noted separately the growth in household bank account balances.

But somewhat overlooked is the amount New Zealand households have stashed in savings accounts. It's a lot, and it's 'lazy money.'

The data revealing this is published monthly by the Reserve Bank in their S40 series. The latest data is to January this year.

Calling the savings account balances 'lazy' is only part of the story. And it isn't the 'laziest' funds we have on hand. Those are in our current account balances, earning nothing*.

That is $25+ billion extra sitting in these accounts since the start of the pandemic, free money for banks. Yes, we do need ready funds for everyday needs, liquidity for emergencies. But the pandemic has raised the stakes, shifted us into a very risk-averse mode.

There are also household term deposit accounts, and these are another $83 bln, earning some interest at least.

And then there is another $80 bln in "savings accounts," put there on purpose, but earning very little anymore.

Being risk-averse is understandable in uncertain times. Holding higher liquidity in uncertain times is understandable too.

But are we over-doing it?

Each of us has to make a judgment for our own situation. Our collective judgments reveal considerable financial fear.

But what we can do is quantify what it is costing us.

If there is $25 bln 'excess' in transaction accounts, and $80 bln in savings accounts earning 0.3% pa, that means $105 bln is earning $240 mln per year.

If all this was in a nine month term deposit account, it would be earning about 2% from the main banks, (or up to 2.25% at Heartland or Rabobank). That too may not seem like much, but it would amount to $2.1 bln per year. So we are leaving $1.86 bln on the table - and our banks are secretly thanking you for this gift!

$1.86 bln isn't minor for banks. They collectively make $6.245 bln in after tax profits. To give them their due, that is after paying $3.08 bln in tax to the Treasury. So the $1.86 bln we are leaving for them by not making our cash savings work harder added +25% to their profits! Their shareholders thank us.

The final context is how much of this is "per household". Stats NZ says there are just over 1.9 mln households (1,908,700 as at December 31, 2021). Of course the $105 bln isn't evenly held by each of those households. But the average is a higher level than you may have assumed - $69,277/household. In addition, we have $27.3 bln in our core transaction account balances, plus that $83.4 bln in interest-earning term deposits. These total $110 bln. So the $105 bln 'excess' held in liquidity is a measure of risk aversion and financial fear, money held close for a concern that 2022 holds clear and present dangers for households. Or we have just gotten lazy.

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44 Comments

by linklater01 | 22nd Mar 22, 9:55am 1647896119

Perhaps the answer is to cover your bets; have the level of cash you feel comfortable, preferably in TDs and be a shareholder. Both the quoted banks have healthy dividend yields.

by chebbo | 22nd Mar 22, 10:11am 1647897092

Great article.

I suspect the issue is one of individual risk/reward. Yes, collectively we're "leaving $1.86 bln on the table", and $1.86b is a lot of money. But from an individual perspective, if I have $10k earning nothing in an on-call account, I'm "only" missing out on $150 by not locking it up for 9 months. Close enough to $100 after tax.

Sure, $100 is $100, but.. meh. It seems like a relatively low price to pay for the security of knowing that I have my money at my fingertips for the next 9 months, should I need it. $100 doesn't go far these days.

If term deposit rates keep increasing at their current clip however, the calculations could change. A 12-month TD at 5-6% would be harder to ignore.

by Solid_Granite | 22nd Mar 22, 10:26am 1647898009

Its interesting how you say its 'free money' for the banks. It was my understanding that banks really don't want or need your deposit, that's why they offer pitiful interest rates.

by David Chaston | 22nd Mar 22, 11:05am 1647900332

It is a common misconception. Yes, the banking system as a whole creates money (see here), but each individual bank does not. Each bank needs to have funding for the loans they make. Full funding. If funding dries up, they have to call in loans. That is why bank runs are so dangerous - banks can't liquidate their loans fast enough to repay depositors, and can go bust quick. (If banks just created money as the conspiracy theory goes, there would never be any bank runs. And they wouldn't need any capital either, so wouldn't be listed on stock exchanges. But neither is true.) Regulation requires them to keep sensible levels of liquidity and capital, so mistakes are avoided when things get tight.

by rjn1 | 22nd Mar 22, 11:38am 1647902314

Thanks David. It's worrying how little the general public understand about our monetary system, particularly now that this kind of misinformation can artificially inflate the perceived benefits of crypto currency.

Perhaps an article explaining the ins and outs of retail lending and the funding thereof is in order (or the revival of one you've no doubt written before).

by the Once-ler | 22nd Mar 22, 12:46pm 1647906366

When you say "Full funding" do you mean they have a dollar in reserve to every dollar lent out? I thought we had fractional reserve banking.

by powerdownkiwi | 22nd Mar 22, 2:27pm 1647912421

You are correct - and I doubt David will answer. And the further problem is that 'collateral' (say the 'value' of something 'securing''a mortgage) is entirely arbitrary too.

by murray86 | 23rd Mar 22, 7:45am 1647974714

Great answer DC! And adds weight to the point that banks rip their depositors off by paying pitiful interest rates, while they make money hand over fist!

by Nzdano | 22nd Mar 22, 10:27am 1647898025

How many are leaving it there waiting for higher term deposit rates to come along?

by fortunr | 22nd Mar 22, 11:55am 1647903314

I am one of them. Rates will go significantly higher, and they will stay high for years to come. I am staying short, or in cash position, until towards the end of this year.

I am also keeping some cash ready to increase my shareholdings if the sharemarkets go into negative territory a little bit more than they have gone so far. I do no want to miss the next dip just because I do not have the cash for it, and I do no want to start leveraging at the moment.

by rjn1 | 22nd Mar 22, 12:01pm 1647903702

Have a look at Kiwibank's 90 day notice saver. Currently paying 1.75% and they'll let you transfer into a TD at any time.

by rolande | 22nd Mar 22, 10:30am 1647898259

Increasingly I am trying to self insure. I used to have medical insurance but was paying $100 a month for the family. But I now have sufficient cash for most eventualities.

I still have living ins but eventually will give that up and save $50 a month.

So liquid assets can have a $ benefit that is not considered in only forgone interest calculations.

by Whatwillhappen | 22nd Mar 22, 11:42am 1647902544

I used to be a big fan of the public system, and otherwise self insuring but the public system said 18 months ago that my brother in law had 6 months to live and another round of chemo wouldn't do much. He then used his entire Kiwisaver balance plus crowd funded $30k for unfunded cancer treatment. He's now in major remission. While now he qualifies for free treatment having spent the initial outlay, he still has to pay for the private doctor to administer it every 3 weeks.

So hope you have $60k + doctor's fees for possible cancer treatment that decent health insurance would have paid for.

by rolande | 22nd Mar 22, 11:59am 1647903562

I got more than $100k although that includes some blue chip shares. But I do take your point.

by refactornz | 22nd Mar 22, 12:57pm 1647907074

$100 per month for the whole family sounds like a bargain.

by bookworm69 | 23rd Mar 22, 8:48am 1647978509

It sure does! We're paying $720 for two of us aged 74 - and that's surgical only cover. Each time we think we may cancel, husband has another problem - eye operations, 3 prostate ops (thank goodness it's gone for good now!), and multiple skin cancers and lumps cut out. I wouldn't want to rely on the health system for those.

by JohnTrz | 22nd Mar 22, 3:44pm 1647917080

Your brother, like all of us, is the victim of successive governments being unwilling to tax enough to sustain a fully effective public health system. We voters are are own worst enemies.

by linklater01 | 22nd Mar 22, 2:47pm 1647913626

rolande,

I understand self-insurance, but be careful. I have health insurance with a $2000 excess-limited self insurance. However, after many years without a claim, I am now receiving almost $2000 every 3 weeks towards the cancer drugs I take. This will continue for as long as the drugs keep working.

I will soon have received more than my total premiums. As the premium rises, I will simply increase my excess.

by rolande | 23rd Mar 22, 9:16am 1647980178

Maybe I should keep my living insurance in the meantime. It's 150k and kicks in without too much restriction.

Good luck with your treatment. I hope it goes well.

by dictator | 22nd Mar 22, 10:31am 1647898287

There is certainly a need to hold a cash buffer. In the US they go overboard with 6 months worth of savings but they lack a lot of the social safety net we have here.

The best way is to have a cap on the size of the cash buffer so that you invest the money elsewhere. This does take a bit of time and effort if people don't have they don't have investments, fund or accounts set up. I'm guilty of holding too much cash myself but I've been rather busy.

Then there are those that are well into retirement and holding money. I can understand that given their goals are short term and they may not have time to recover long term investments when there's a risk of short term losses.

by J.C. | 22nd Mar 22, 11:12am 1647900772

There is certainly a need to hold a cash buffer. In the US they go overboard with 6 months worth of savings but they lack a lot of the social safety net we have here.

Where did you get this information from? According to recent research, 56% of Americans are unable to cover an unexpected $1,000 bill with savings. That is actually quite consistent with much research across the Anglosphere.

https://www.cnbc.com/2022/01/19/56percent-of-americans-cant-cover-a-100…;

by dictator | 22nd Mar 22, 12:01pm 1647903709

I should have been more clear. There are financial gurus that say people that should hold this much as their 'emergency fund'.

In general the target of this article is not people who have no capacity to save. If you don't have any money because every cent goes towards just surviving you aren't holding money. Those that can just save are also not going to be significant in this statistic. This is only addressing the 44% (roughly).

by J.C. | 22nd Mar 22, 12:40pm 1647906048

I think that's the point. The central banks and ruling elite don't want people to save. They need people to be living on the edge for their data indicators to show they're doing a good job.

by Dave Moderato | 22nd Mar 22, 10:32am 1647898373

Some of us have to be liquid. To pay Robbo next month!

by Antz | 22nd Mar 22, 10:49am 1647899375

Much of that money may be waiting for business or investment opportunities, or waiting for over-priced assets to deflate. Cash ready to hand makes one a cash buyer, whether of real estate or businesses, and that is a very useful thing to be as lending becomes more fraught. For many, it has nothing to do with fear or risk aversion.

by rjn1 | 22nd Mar 22, 11:31am 1647901916

Exactly, that explains why I'm mostly in cash at present. I see this as taking a risk in effect, as if I'm wrong about the opportunities I expect, I've missed out on returns.

by Carlos67 | 22nd Mar 22, 10:52am 1647899546

Always a bit perplexed by your negativity towards money just sitting in banks David. Sure it sounds like a lot but spread over the population its not huge. I think the facts are that many people have zero in the bank and are running on OD let alone stats like was it 2/3 of people have less than a net positive $1000 in the bank which is pathetic. From the graph you can see its only really beginning to climb back to what it was in 2019 anyway so not sure what the big deal is. As pointed out above if TD rates get back to above 4% let alone 6 or 7% some of us will be rolling in it. TD rates have been so bad at 1% unless you have a large amount its not worth investing it but things are changing.

by FCM | 22nd Mar 22, 11:09am 1647900589

Yep I have cash off setting one of my mortgages. You may call it lazy money but if I need it, I have it. I could just pay the whole amount off the mortgage but then if I need it for car breakdown or get made redundant. I don't have to go to the bank cap in hand to see if I can borrow against the house (which if made redundant may be hard). I also have $ in shares, since xmas I would of rather had the $ in the bank, as some of those have tanked more than inflation but having some cash now gives me the choice to invest in those while the market has slipped. There is always a balance.

by Nifty1 | 22nd Mar 22, 11:21am 1647901271

Do you think if sh*t hits the fan, the bank you're with could use your funds to repay borrowing?

by FCM | 22nd Mar 22, 1:32pm 1647909135

well it would have to be a lot of Sh**..but personally..gives me plenty of time and options.

by tronic | 22nd Mar 22, 1:09pm 1647907760

Just started investing in shares in January, it's been Great (sarc).

by Zachary Smith | 22nd Mar 22, 11:21am 1647901290

The money stashed away in savings accounts could help keep the property market above water. People have enough to cover increased interest rates etc.

With unemployment being low many will feel that they can cut back on expenses as well as top up the monthly mortgage cost of the rental property and be reasonably comfortable. Some will be able to hold out for years and years.

by RickStrauss | 22nd Mar 22, 11:51am 1647903096

May do. May keep housing afloat while sacrificing the hospitality industry.

by refactornz | 22nd Mar 22, 1:01pm 1647907275

That excess $100B hanging around would be enough to buy 50-100K mortgage-free houses.

by Noncents | 22nd Mar 22, 11:23am 1647901404

I am always tentative around drawing conclusions using aggregated big data. The average tells part of the story, Based on the often mentioned people who live "week to week" and those who can't afford a money shock (usually around 70%), my suspcision is that the individual amounts would likely be a great deal lower. So median and/or quartile balances would be a much better representation of how the money is spread.

I also believe that average $ per account would add additional support as to the actual amount held by people. Household money is often not pooled these days. i.e. Teen kid could have $10k for a car with another child having $5k for study. One parent could have $43k, the other parent could have $2k. Or it could be a flat of 6 people with $10k each. So yes, one person could use a TD or other investment form, but the rest of them probably not.

Average per account would also factor in any potential business savings accounts. Money set aside for tax payments/wages etc...

Of course there will be many who do have legitimately high savings ammounts due to aspirations of home ownership, or other imminent purchases (holidays, Cars, rennovations, etc...) so I wouldn't say it is wasted money, just awaiting the transaction date.

My personal belief is that it is risk. We have been conditioned that a drop in interest rates is bad times ahead. So the lower the rate the more likely people will hold cash. Covid and the war in Ukraine have also highlighted that even with all it's flaws, cash is still king. So having a bit set aside is not the worst idea at this point in time.

by HouseMouse | 22nd Mar 22, 11:28am 1647901692

Another good article, David is on a good run.

As he says, each person needs to make their own choice depending on their circumstances.

For me, it's a time to be risk averse. The proceeds of share sales last October went 50% to term deposit, and 50% to cash in the bank. The term deposit matures in a few weeks time.

I will probably do another 6 months, at a higher rate. And keep that other cash ready for another dip into shares, potentially. Although if term deposits are 3.5% or higher by late this year, I might chuck 70% into those.

by JRSNZ | 22nd Mar 22, 11:42am 1647902573

$215B of lazy grossly negative real rate cash "deposits". A not-so-slowly melting ice cube of wealth.

by Whatwillhappen | 22nd Mar 22, 1:15pm 1647908115

My cash balances are the depreciation (depreciating ice cube?) I'm setting aside for household goods repairs/replacement. They need to remain liquid and 3 month term deposits aren't returning enough to make it worth my while. Like someone else said - $100 a year isn't worth my while

by JRSNZ | 22nd Mar 22, 2:51pm 1647913895

Cash set aside for a relatively short-term spending goal isn't much of an issue. I would hazard a guess however that much of that $215B is long term savings that is being eaten by inflation and a now-alarmingly high rate.

by Zachary Smith | 22nd Mar 22, 3:32pm 1647916344

With war and pestilence and now Ruapehu about to erupt small amounts of interest seem hardly worth worrying about.

by RickStrauss | 22nd Mar 22, 5:09pm 1647922177

Ruapehu is the surprise horseman there.

by SimonRo | 22nd Mar 22, 3:44pm 1647917048

If I had instead used my excess savings to buy shares of ANZ a year ago at $30.84 I could have sold them today for $30.00

by Mountie | 23rd Mar 22, 8:17am 1647976666

Or you could have bought EBOS and be up 33%.

by linklater01 | 23rd Mar 22, 10:22am 1647984170

SimonRo,

Pretty silly comment. I could give you a list of companies that have done much better and another list that have fared much worse. What would that prove? Nothing.

No sensible person has a 1 year time horizon on shares, nor do they concentrate their risk on just one.