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.
44 Comments
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.
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.
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).
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.
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.
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.
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.
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.
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.
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…
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).
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.
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.
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.
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.
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.
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.
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
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.
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