Whether you’re planning for a holiday or saving for a house deposit, savings accounts are simple, low risk way to boost your nest egg. Learn how to choose the right account for your needs and what interest rate too look for.
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What types of savings accounts are there?
A savings account is a type of bank account where you deposit your money so it can earn interest. Generally, interest is calculated daily and paid monthly. The rate of interest is influenced by the Reserve Bank of Australia’s cash rate.
The different types of savings accounts include:
- Introductory savings accounts
Banks will offer bonus interest for the first few months of the loan. The interest rate will then revert to a lower standard rate after a number of months, typically 3-6 months.
- Conditional savings accounts
This is a savings account where to earn the highest interest rate, you must meet the bank’s conditions, such as:
- Depositing a certain amount of money into the account each month;
- Making minimal withdrawals (or no withdrawals) from your savings account each month;
- Keeping the balance of your savings account above a certain amount; or
- Using another of the lender’s products, such as a credit card.
If you don’t meet the conditions, you’ll be reverted to a much lower (sometimes 0 per cent) interest rate for that month.
- Online savings accounts
These are savings accounts that are based entirely online and usually accessed just via an app or online banking. Online savings accounts avoid costly overheads by cutting out branches altogether. This makes for an account with a typically higher rate and less fees than a traditional bank’s savings account. If you’re the kind of person who relies on branches and face-to-face banking, this type of account may not suit.
- Children's savings accounts
Children’s savings accounts can help teach your child basic financial literacy in a digital age. Kids can gain an understanding of the banking system and learn how to save money, especially when paired with educational savings apps. Compared to adult accounts, children’s savings accounts generally have higher interest rates, but can come with higher fees.
- Retirement savings accounts
Retirement savings accounts are targeted towards Australians over the age of 55 and pensioners. Interest rates are typically higher when you deposit larger amounts. Before compulsory superannuation, retirement savings accounts were a popular way working Australians could save for their retirement. While they are becoming more rare, there are still several accounts on the market. Retirement savings accounts are also afforded the same regulations and tax benefits as superannuation.
How compound interest works
How compound interest works:
Savings accounts use compound interest to help you reach your savings goals. Compound interest on high interest savings accounts is calculated daily and paid monthly.
Compound interest can help accelerate your savings because you earn interest on the money you initially deposit, as well as the interest you’ve already earned. In essence, you’re earning interest on interest.
Also, making additional deposits can seriously transform your savings thanks to compound interest. For example, if you deposit $1,000 into a savings account earning 2 per cent interest over five years, your deposit would grow to $1,105. If you also made monthly deposits of $200, your deposit would grow to $13,715 thanks to compound interest.
What to look for in a savings account
Here are a few things to consider when shopping around for a savings account:
|Interest rates||The biggest deciding factor for a savings account is it’s interest rate. The higher the rate the bigger boost your savings will get.|
|Fees and costs||A high interest rate doesn’t mean a lot if the savings account charges high fees. These can include ongoing admin fees, ATM fees, eftpos fees and electronic transfer fees.|
|Account type||Online, introductory, conditional, children’s or retirement accounts.|
|Linked accounts||Often a savings account will need to be linked to a regular bank account to ease the transferring of funds or meet certain conditions. Before you apply, ensure the bank account will also suit your financial needs and compare any fees or hidden costs.|
|Spending habits||If you’re the type of person to dip into your savings, consider looking for an account that doesn’t reduce your interest rate for doing so. This requires looking over the savings accounts conditions before applying.|
What other low risk savings options are there?
The major benefit of a savings account is the low risk. You’re not investing anything, and your money can just sit and earn interest. It’s safer than hiding it under your mattress.
The other low-risk option to park your savings in is a term deposit. They are similar to savings accounts, however after you’ve deposited your money you cannot reclaim the funds until the end of a fixed term.
Term deposits are a competitive option for those who are prone to dipping into their savings. Term deposits allow you to lock away your money at a fixed rate, and charge you high fees for withdrawing it early.
Both savings accounts and term deposits are protected under the Financial Claims Scheme. The federal government will guarantee up to $250,000 for each account holder at each licenced bank, building society or credit union incorporated in Australia.
How do you get the best interest rate?
The easiest way to choose a competitive savings account rate is to:
- Keep your rate above inflation
A general rule of thumb is to choose a savings account rate higher than inflation levels. You can visit the RBA’s website to see current levels. This is simply because if your savings don’t grow at or above the rate of inflation, or your money will devalue.
For example, a savings account with $100 in it at a savings rate of 1 per cent may grow to $101 in a year. But if inflation was 2 per cent, you’d need to have $102 for your original deposit to be worth the same amount.
- Use comparison tables
Comparison tables allow you to compare apples to apples. Depending on the savings account type, you can filter down and view a range of accounts maximum interest rates. You can also compare how much interest you may earn on your original deposit. This can help you to choose the right savings account for your savings goals.
Keep in mind that there is more to a savings account than interest rates. If the account has high fees it may end up costing you more than expected. Further, if the high interest rate on your account comes with conditions, try to be prepared to meet them or you will miss out.
How interest rates are determined
Savings account interest rates are determined by the provider and influenced by the Reserve Bank of Australia (RBA) cash rate.
Every first Tuesday of the month (besides January), the RBA meets to decide whether the cash rate should be increased, decreased or hold. This impacts millions of Australians and can alter interest rates for deposit accounts as well as home loans.
If the cash rate were to be cut, for example, savings account providers would be expected to cut interest rates too. Vice versa for increasing the cash rate. When the cash rate is cut it can mean bad news for those relying on or living off of savings, such as retirees. In turn, it is generally good news for mortgage holders as their repayments may be reduced. The RBA takes all of this into consideration when determining whether to change the cash rate.
What are savings accounts traps?
Just because savings accounts are considered low risk, doesn’t mean there aren’t common mistakes you can make.
- Falling for introductory rates
Some people are shocked when they sign up for a savings account and find themselves earning less interest than was advertised. As mentioned above, some savings accounts can offer higher introductory rates for a few months to attract new customers. These can then revert to much lower ongoing rates. If you’re not careful, this low rate may be buried in the fine print. Do your research before applying for any savings account.
- Not meeting conditions
If you’re not meeting the requirements of your conditional savings account then you’re missing out on some serious savings. In some instances the base rate of the savings account may be zero or just above it. Making this mistake time after time could cost you years towards your savings goals.
- Big savings but little risk
Ironically, another way some people misuse savings accounts is to store too much money there. Savings accounts often deliver lower returns than other investments. Once your balance reaches a certain amount, it might be worth considering whether you should withdraw some of the money and invest it elsewhere. Just make sure you understand the higher level of risk associated with your new investment.
- High fees
Some savings accounts can charge higher than average fees. Childrens accounts, for example, are known for charging high interest but high fees to compensate. Use comparison tables and savings calculators before you apply for any savings account to make sure you aren’t taking steps backwards in your savings journey due to costly fees.
Can you have a joint savings account?
Many lenders offer joint savings accounts, which give two or more people access to the one account.
You can open a savings account online in just a few minutes, or you can do so in a branch. You’ll need to provide both parties identification and contact details, as well as your tax file numbers if you don’t want to be taxed at the maximum rate. Just fill in the application and submit it to the savings account provider of your choice.
Joint accounts are most commonly used by people in a romantic relationship, although they can also be used by friends or relatives who want to pool their savings. It’s important not to open a joint savings account with somebody unless you trust them. Keep in mind they will be able to withdraw any money you deposit in the account.
Sally is the Research Director for RateCity and a regular commentator on television and radio about personal finance matters. She is passionate about helping everyday Australians get access to affordable finance options, and helping people save money through smart budgeting and easing everyday expenses. Sally is a contributor to news outlets including Fairfax, News Ltd and Money Magazine, among others.
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Frequently asked questions
What is the interest rate on savings accounts?
As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria
Can you direct deposit to a savings account?
Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.
How do I open a savings account?
Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process.
You may be required to provide:
- Personal details, including identification (driver’s license, passport etc.)
- Tax file number
- Employment details
How to make money with a savings account?
Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.
To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.
How much money should I have in my savings account?
A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.
If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.
How can I get a $4000 loan approved?
While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:
- Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
- Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
- Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)
Savings Account Frequently Asked Questions
Can you set up direct debits from a savings account?
It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.
Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.
What is a savings account?
A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.
Can I overdraft my savings account?
A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.
Can you have a joint savings account?
Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.
Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.
Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly.
What is a good interest rate for a savings account?
A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.
How to open a savings account for my child?
Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.
Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.
Can you set up a savings account online?
Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.
Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.
Who has the highest interest rates for savings accounts?
How does interest work on savings accounts?
The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency.
Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.