How you can beat the savings slump

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Inflation and tax hit real returns

It's a red alert for savers: with interest rates at historical lows, 95%-plus savings accounts are now losing people money in real terms once tax and inflation are taken into account.

To beat inflation and tax, Mozo calculates that average-income savers need to earn an interest rate of at least 4.14%.

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But at the time of writing only three savings accounts out of 111 on the market pay this: ME Bank's online savings account with everyday transaction account, ING Direct's Savings Maximiser and UBank's USaver with Ultra. And of these, the first two are introductory rates that last only a few months.

While the Reserve Bank cash rate has remained at 2.5% since last August, interest rates on online savings accounts and term deposits have been falling steadily in 2014. According to our database, the average ongoing savings rate is now just 2.55%, down from 2.95% a year ago.

Term deposits aren't much better, with one-year rates now averaging 3.57%. There isn't a single one-year term deposit that will increase your money in real terms. The only way to earn 4.14% or higher is to lock in for three years or more.

The savings situation is even worse for those on higher incomes who pay higher tax. If you're on $80,000 a year you'll need a savings rate of 4.6% to beat tax and inflation. There's only one account that currently offers this, ME Bank, and it's only for five months.

We recommend seven strategies for savers to beat the slump:

1. Switch to the best rate you can find and switch again as soon as the introductory rate period runs out.

2. Use savings to pay down debt, especially expensive credit card debt.

3. Offset your home loan, which can save you thousands in interest.

4. Diversify and spread your savings between cash, shares, property and increased super.

5. Play the market and gradually build up a strong portfolio.

6. Exchange-traded index funds are great for new investors.

7. Managed funds can be good for those wanting to make ongoing contributions.

Australia's situation may not seem as dire as Europe's, where official deposit rates are now negative (-0.1%). But with our inflation rate predicted to rise even further by the end of 2014, savers need to take action.

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