Putting savings into cash when growth assets tumbled during the global financial crisis was not such a difficult decision, especially when rates on term deposits were so good.
But now it is becoming trickier for those wanting both a safe place for their cash and a decent rate of return as the official cash rate set by the Reserve Bank comes down. One-year term deposits for $50,000 paid almost 6.7 per cent in October 2008. That is the average rate paid by about 100 financial institutions on the RateCity database.
The rate fell to 3.8 per cent in October 2009, and then rose to 5.9 per cent in October 2010 and 5.6 per cent in October last year. One-year term deposits for $50,000 are now paying 4.55 per cent.
Most economists expect the Reserve Bank to cut interest rates at least one more time. They may even be cut two or three times more before its rate-cutting cycle is finished. That's because the non-mining part of the Australian economy is struggling and needs more stimulus. And the Reserve Bank can lower interest rates without the risk of an outbreak of inflation, as it remains less than the bank's upper-limit target of 3 per cent.
Financial institutions are still chasing our savings and so the interest rates they pay on cash deposits have not fallen by as much as the 1.5 percentage point cut in the cash rate during the past year.
However, the trend to lower interest rates on cash deposits and term deposits looks set to continue.
Alternatives for investors seeking income, such as higher-yielding shares, entail risk to capital.
For absolute guarantee of capital, investors cannot go past cash deposits. The federal government guarantees the first $250,000 a person per financial institution, and covers money on deposit with banks, credit unions and building societies. The guarantee was brought in during the height of the GFC to reassure investors their deposits would be safe.
But even a product as simple as a term deposit can have traps.
In 2010, the Australian Securities and Investments Commission released a report on term deposits in which it highlighted some of the tricky marketing that can catch consumers of the products unawares.
The regulator discovered some financial institutions were attracting consumers into high-rate term deposits, then rolling them over into lower rates. This practice is known as ''dual pricing'' of term deposits.
Investors should also be aware that term-deposit rates are negotiable. Those with, say, $50,000 or more to invest should always speak to financial institutions because some of them will negotiate a better interest rate on larger amounts.
With interest rates on term deposits likely to fall further, there is a temptation to lock into a longer-dated term deposit while rates are still relatively better.
However, while the view from the economists at the moment is for lower rates, the outlook on interest rates can change quickly. Investors could spread their cash between term deposits with differing dates of maturity.