Online Savings - Beware the Devil in the Detail
Some of the biggest interest rates to be earned are attached to online savings accounts and the money-savvy saver is taking advantage of this by splitting deposit accounts. A zero or low-fee transaction account gives day-to-day transactional access, while a high interest earning savings account ensures that at least a percentage of hard-earned money is earning maximum interest. What could possibly go wrong with this plan?
Interest rates of up to 6.8% are swaying consumers to online savings but there are conditions to be aware of such as minimum balances to earn the advertised interest rate, high transaction fees and limited access. Some saving accounts offer the full-on rate, others offer a base rate with bonus incentives for regular deposits. One condition consumers should be fully aware of, however, is forfeiting interest earned on a given balance if funds are withdrawn at any time during the month.
When looking at an account that forfeits interest if a withdrawal is made, be aware of the ramifications. If, for instance, you have $10,000 deposited in that account and you withdraw $500, you receive zero interest on the remaining $9,500 for that month. The graph below shows that you are actually worse off when you make a single withdrawal in a year than you would be if you had the $10,000 in an account with a slightly lower rate, but no interest penalty.
The drawcard of earning a big interest rate on your money is powerful but RateCity urges consumers to look at other considerations when choosing the best savings account for them. Just as credit cards are tailored to suit spending and repayment behaviour, deposit accounts are tailored to suit spending and saving patterns. Online savings accounts is an area of tremendous growth and there are now 31 five-star online deposit accounts at RateCity, compared to 18 six months ago. Five percent of these accounts include an interest forfeit clause. Lack of awareness of this could lead to an unpleasant surprise at statement time.
This article by RateCity Executive Chairman, Andrew Willink, appeared in Money magazine's 'In Your Interest' section - June 2007. It is reproduced with permission.
For more on Money go to http://money.ninemsn.com.au/
Related Links