Cash Assets
Cash sits at the foundation of every portfolio. It offers yield without growth and is used primarily for liquidity, short-term goals, and emergencies. In the asset spectrum, it sits at the lowest end of the risk-return scale.
For most people, holding around 3–6 months of essential expenses (your emergency buffer) or roughly 2 % of total portfolio value in cash provides adequate flexibility without eroding long-term returns.
Cash earns interest because banks lend your deposits (e.g. to home or business borrowers) and pay you a smaller rate in return. The difference between what they charge and what they pay is the bank's profit margin.
Understanding where and why to hold cash helps you strike the balance between liquidity, safety, and return.
Ways to hold cash
| Cash Type | General Interest Rate | Key Conditions / Notes |
|---|---|---|
| Account – Transactions | 0 – 1 % | Everyday account for spending and bills. Very low interest and may include monthly or transaction fees. |
| Account – High Interest Savings | 4 – 5 % | Higher variable interest rate. Bonus interest can require regular deposits, growing balance, and a linked transaction account. |
| Account – Mortgage Offset | 5 – 6 % (effective saving) | Linked to a home loan. Each dollar reduces mortgage interest instead of earning interest. Provides a tax-free, risk-free "return" equal to the loan rate while funds remain available anytime. |
| Term Deposit | 3 – 4 % (fixed) | Fixed rate and term (1 month – 5 years). Early withdrawal usually requires 31 days' notice and results in a penalty. |
What to Consider?
Each account type serves a specific purpose — from everyday access to strategic cash management.
Transaction Account
- Holds enough cash to cover everyday living expenses (e.g. groceries and bills).
- Has low or no fees (e.g. account keeping or ATM withdrawals).
High-Interest Savings Account
- Holds enough cash for: (1) approximately ~3–6 months of essential expenses (your emergency buffer), and (2) any known short-term expenses (e.g. upcoming home deposit, holiday, or new car).
- Ongoing interest rate is competitive and account has low or no fees.
- Requirements for bonus interest rates are understood.
- Excess cash beyond this buffer should be directed to higher-return, tax-efficient investments (e.g. ETFs, super).
Term Deposit
- Only suitable when you do not need access to the money during the fixed term.
- Can earn a higher fixed rate than savings accounts.
- Suitable when you have a known expense within 3–12 months.
- Excess cash beyond this buffer should be directed to higher-return, tax-efficient investments (e.g. ETFs, super).
Mortgage Offset Account
- Reduces mortgage interest while keeping funds fully accessible.
- Holds enough cash for: (1) approximately ~3–6 months of essential expenses (your emergency buffer), and (2) any known short-term expenses (e.g. renovations, upcoming purchases).
- Works only with a variable-rate home loan where interest is recalculated daily.
- Provides better value when your loan rate exceeds your after-tax savings rate (offset savings are tax-free, while savings account interest is taxed).
- If your loan is fixed-rate, the offset usually won't apply — use a high-interest savings account until the fixed term ends.
- Consider using two linked offsets — one for everyday spending and one reserved for your emergency buffer.
- Excess cash beyond this buffer should be directed to higher-return, tax-efficient investments (e.g. ETFs, super).
Example Scenario — Why Use an Offset for Your Buffer
| Scenario | Where Cash Is Held | Return / Saving | Tax Outcome | Notes |
|---|---|---|---|---|
| A. Mortgage Offset | $20 000 offsetting a 6 % home loan | Saves $1 200 interest p.a. | Tax-free | Full liquidity; reduces mortgage cost while cash available. |
| B. Savings Account | $20 000 earning 4.5 % interest | Earns $900 before tax, ≈ $630 after tax | Taxed | Slightly lower after-tax benefit. |
| C. Term Deposit | $20 000 fixed at 5 % | Earns $1 000 before tax, ≈ $700 after tax | Locked | Limited flexibility for emergencies. |
Result:
Keeping your emergency fund in an offset account delivers higher after-tax savings while staying fully accessible.
If you need to draw on the funds (e.g. job loss), your loan interest rises slightly — but you've already saved interest beforehand, making it both efficient and flexible.
Risks and Limitations
| Cash Type | Key Risks and Limitations |
|---|---|
| Transaction Account |
|
| High-Interest Savings Account |
|
| Term Deposit |
|
| Mortgage Offset Account |
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| All Cash Types |
|
Offset Savings Benefit Tool
Compare how much interest you save by holding cash in an offset account instead of a savings account.
Annual Benefit of Using Offset
The same $50,000 in a 4.5% savings account earns $1,575 after 30% tax.
Net benefit: +$1,425 per year.
Cash Value Simulator
See how inflation and savings returns affect the real value of cash over time.
10-Year Cash Value Analysis
| Year | Nominal Value | Real Value | Purchasing Power |
|---|---|---|---|
| 0 | $10,000 | $10,000 | 100% |
| 1 | $10,360 | $10,058 | 101% |
| 2 | $10,733 | $10,117 | 101% |
| 3 | $11,119 | $10,176 | 102% |
| 4 | $11,520 | $10,235 | 102% |
| 5 | $11,934 | $10,295 | 103% |
| 6 | $12,364 | $10,355 | 104% |
| 7 | $12,809 | $10,415 | 104% |
| 8 | $13,270 | $10,476 | 105% |
| 9 | $13,748 | $10,537 | 105% |
| 10 | $14,243 | $10,598 | 106% |
FAQ
Common questions about holding and managing cash effectively.
Liquidity refers to how quickly and easily you can access your money without losing value. Cash in a bank account is highly liquid because you can withdraw it immediately. Term deposits are less liquid because your money is locked away for a fixed period.
Interest income from both savings accounts and term deposits is fully taxable at your marginal tax rate. The bank will send you a statement at the end of the financial year showing your total interest earned.
Most banks allow early withdrawal but charge significant penalties — typically 30–90 days of interest. Some banks offer partial withdrawals. Always check terms before investing and consider shorter terms if you might need access.
Deposits up to $250,000 per person per institution are guaranteed by the Australian Government under the Financial Claims Scheme.
When inflation is higher than your savings rate, the cost of goods and services rises faster than your money grows. For example, if inflation is 5% and your savings earn 3%, your money loses 2% of purchasing power each year.
After maintaining your 6-month emergency fund, consider:
- Paying down high-interest debt.
- Maximising super contributions.
- Investing in growth assets for long-term goals.
- Using offset accounts for tax-free returns.
- Use a mortgage offset account for emergency and short-term cash — it provides liquidity while reducing home-loan interest tax-free.
No. The RBA cash rate is the benchmark rate banks use to lend to each other. Your savings rate is typically 0.5 – 2% below the RBA rate, as banks retain a margin to cover costs and profit.
A cash ETF (Exchange Traded Fund) invests in short-term money-market instruments like bank deposits and government securities. Example: AAA.ASX (BetaShares Australian High Interest Cash ETF).
A mortgage offset account is a transaction account linked to your home loan. Money in this account reduces the balance on which interest is charged. For example, if you have a $500,000 mortgage and $50,000 in your offset, you only pay interest on $450,000. This effectively gives you a tax-free return equal to your mortgage rate, with full access to your cash at any time.
Both reduce the interest charged on your home loan, but they work differently: An offset account is a separate transaction account linked to your mortgage. The balance offsets your loan for interest purposes, and you can access the money anytime. A redraw facility involves making extra repayments directly into your loan. You can later "redraw" these funds, but access may take longer and can affect your repayment schedule or loan records.
Usually not. Fixed-rate loans have pre-set interest calculations that don't change daily, so the offset balance won't reduce your interest. Only variable-rate loans or split loans (with a variable portion) offer full offset benefits. For fixed loans, keep cash in a high-interest savings account instead.
Yes. Some lenders allow multiple offsets linked to one loan. This can help you separate spending, savings, and emergency buffers while keeping all balances working to reduce interest.
Some fixed or basic loans offer a partial offset, where only a percentage of your balance (e.g. 40–50%) reduces interest, or you earn a small interest rate instead. Always check your loan's terms — it's not the same as a full offset.
Once the mortgage is fully paid off, the offset no longer provides a benefit — it functions like a normal transaction account but doesn't earn interest. At that point, consider transferring your funds to a high-interest savings account.