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Many people fail to realise that having your money in the bank is a form of investment. In choosing to save your money in the bank, you will receive interest. This interest is passive income - you will receive it just for leaving your money there. However, it is not possible to achieve a capital gain on a cash investment.

There are many different types of bank accounts, and being aware of the options can help you to make better investment decisions in this regard. Many investment portfolios will leave at least some of the money in cash investments, as this is the investment option with the lowest risk. This is the most significant advantage associated with the cash investment option. It is also true to say that when investing your money in cash the final return can be predicted with a high degree of accuracy. This will help in the budgeting process.

However, there is one significant disadvantage. In general, this will be the option with the lowest return. The RBA will set the cash rate (effectively the wholesale price of money), and the banks will generally pay a rate which is lower than this to its customers. As interest rates have been relatively low in the last ten years, this has meant that the return available has been very low. For those who rely on this income, this has been a significant disadvantage. In particular, many retired people look for a low risk option when investing their money, but low returns in cash accounts have contributed to a fall in living standards for some of these people.

When you put your money in the bank, the simplest distinction is between a savings account and a term deposit. A savings account is an everyday account. We use them to hold the money that we receive as income, and then we access them when we want to buy something. If you have a bank account, the odds are that it is a savings account. On the other hand, a term deposit exists when you agree not to change the balance in an account for a specified period of time. For example, a twelve month term deposit exists when you do not make any deposits or withdrawals for a period of twelve months. During this period the bank is able to invest your money and gain a higher return. As a result, they will pass some of the extra money that they make on to the customer. In general, we can conclude that the interest payable on a term deposit will be higher than you would receive on a savings account.

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