How do you know when your savings account is on the nose and what should you do about it? Jackie Pearson investigates.
September 30, 2009
What are the tell-tale signs that should make you think twice about hanging on to your current savings account? The answers to the following questions will help you to determine whether your existing savings account is worth keeping or sweeping.
1. Does it pay enough interest?
Some accounts currently don't pay any interest at all. In fact, with some accounts you have to have a balance of at least $25,000 before you earn a cent of interest.
By comparison, most online savings accounts pay interest on small balances. Since March 2008 the average online savings rate has fallen from over 6 percent p.a. to the majority (over 93 percent) currently paying interest rates equal to or above the official cash rate of 3 percent p.a.
For example, the UBank USaver account currently offers the highest rate available at 5.11 percent p.a. and a bonus 0.10 percent p.a. if you deposit $100 or more per month. If you start with no balance and save $400 per month, with the U-Saver you could earn about $3,349 in interest in five years. Why would you stay in an account that pays no interest?
2. Does it have too many restrictions and penalties?
Accounts that penalise you for making withdrawals or only pay “bonus” interest if you maintain a certain balance or make regular deposits may be useful for people who lack the discipline to save. But online savings accounts are proving to be effective savings vehicles without such restrictions.
Although your money is ‘at call' in an online account, the fact that you have to transfer it to another account before withdrawing can act as a ‘circuit breaker' and give you time to think before you start to whittle away at your savings.
3. Are you charged fees on your savings?
Not only do some so-called savings accounts pay low or very little interest, but to add insult to injury, they charge you fees: fees for over-the-counter withdrawals, fees for ATM withdrawals from your own network (as much as $1.20 per withdrawal), fees for cheque books (up to $18.75 for 25 cheques) and fees for cheque withdrawals. And that can be in addition to a monthly account-keeping fee.
Every fee you pay erodes your ability to reach your savings goals. By contrast, many of the best savings accounts are completely fee-free.
4. Does the account tie up your money for too long?
For instance, if you're currently using term deposits to save money you may be at a disadvantage when interest rates start to go up again. Online accounts, on the other hand, give you the flexibility to access your money whenever you want and take full advantage of interest rate increases.
Get a better deal
Don't be embarrassed if your savings account has some of these negatives but don't continue to put up with it either. Australians have a habit of staying loyal to their bank and not reviewing and comparing their accounts as often as we should.
Although interest rates available for savers are much lower than they were a year ago, competition between banks, building societies and credit unions is still fierce so don't think you have to put up with an inferior savings product.
The type of savings account you need will also depend on your saving and banking habits. If you have a large amount of money that you simply want to park somewhere safe for a period of time in an account that still gives you branch and ATM access, a cash management account may be the best option.
If you have difficulty staying disciplined with your savings, the accounts that penalise you for withdrawals and/or pay bonus interest for making regular deposits may be your best bet. However, with rates set to start increasing sometime soon an online savings account with no fees and a competitive interest rate gives you the flexibility to stay ahead of the game.