Savings accounts: Should I stay or should I go?

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When is it wise to switch savings accounts and when should you simply stay put? Jackie Pearson examines your options.

December 1, 2009

Your savings are the cheapest source of money that our banks can get their hands on, so expect “robust” competition to continue, particularly in the area of online and “serious” savings accounts.

The dilemma is what to do when you open your Sunday paper and find a savings account advertisement with a headline rate substantially higher than the one you are currently earning. When is it prudent to switch to an account with a higher rate?

Just too messy?
One factor is to consider how bundled and complex your banking is. If, for example, you have a packaged home loan with an offset account, and fee and insurance discounts, it may be better to stay put.

But the emergence of online savings accounts means it is easier to direct some of your savings dollars at no fee/high interest offers. The ease of internet banking means brand loyalty just isn’t as important as it used to be.

Accounts by type
Historic data from the Reserve Bank of Australia (RBA) shows that some types of savings vehicles tend to sustain a better deal than others over time. Since 2004 online savings accounts, as a group, have consistently outperformed bonus saver accounts, cash management accounts (CMAs) and one-year term deposits for balances of $10,000.

On average, online savings accounts have paid 1.71 percent higher interest than bonus saver accounts since January 2004. There have been times (2004 and 2005) when the margin between online and bonus savings accounts has been higher than 2 percent.

CMAs have been the poorest performing account type during the past five years. Online savings accounts have paid, on average, 2.2 percent more interest than CMAs.

At times (2006) the margin between online accounts and CMAs has crept higher than 3 percent. That’s a substantial difference in how hard your money is working for you – the difference between your money keeping up with or falling behind inflation.

Study the fine print
Of course, you then have to figure out which term deposit or online account is best. Consider features, fees and how much access you want to have to your money.

Term deposit rates will also tend to “take the lead” over other account types when it comes to interest rate trends because the advertised rate is locked in for the whole year so there’s a bit more guess work involved in picking the best time to lock your money up.

Based on interest rate trends over the past five years, the good earners seem to be online savings accounts and one year term deposits. If you have stuck with your old CMA or bonus saver throughout the online savings revolution, it may be time to cut your losses and join the new millennium.


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