If you manage most of your incoming and outgoing money through an everyday bank account, you might be wondering if you can earn a decent amount of interest on a standard transaction account.
While some transaction accounts come with a higher-than-average interest rate, these rates still tend to be lower than the interest rates available on savings accounts.
What’s the difference between a transaction account and a savings account?
A transaction account, also known simply as a ‘bank account’, is a standard account used for day-to-day expenses. This is typically the account that you have your salary paid into and use to pay bills. You can access funds using a debit or credit card, and usually don’t have to pay any fees for ATM withdrawals or transfers.
A savings account is designed to help you save over the long term and allow you to earn interest on the money you’ve deposited into the account. Typically, they offer a higher interest rate than a standard transaction account.
Savings accounts often carry withdrawal fees and monthly withdrawal limits to encourage you to save. This is also advantageous for banks, because they can use customers’ savings deposits to balance their books when lending money to other customers.
How do bank account interest rates work?
Banks set interest rates based largely (although not entirely) on the Reserve Bank of Australia’s cash rate. Usually, a lower cash rate equals a lower interest rate on your savings account.
Some high-interest bank accounts earn compound interest, which means you earn interest on the money you have deposited as well as the interest you’ve earned. Other accounts earn simple interest, which means you only earn interest at the end of a specified term.
It’s important to check how often interest accrues on a bank account, because a compound interest account will yield higher returns over time.
For example, if you invest $8,000 for three years at 5 per cent per year, with simple interest paid at the end of the term, you would earn $1,200 in interest ($400 each year), giving you a total balance of $9,200.
If you invest $8,000 for three years at 5 per cent, with compound interest calculated and added monthly, you would earn $1,292 in compound interest after three years, giving you a total of $9,292. The total returns are higher because you earn interest on interest.
Advantages and disadvantages of high-interest bank accounts
There are plenty of investment options out there, and a high-interest bank account is just one of them. Here are some of the potential benefits and drawbacks to having a high-interest transaction account:
- Safe investment – Your money is protected under the Australian government’s guarantee for authorised deposit-taking institutions (ADIs) such as banks, building societies and credit unions.
- Easy access – Because it’s a transaction account, it’s easy for you to access your money when you need it.
- Dual function – You can use a single account for everyday expenses as well as to save money.
- Lower interest rates – Typically, even high-interest bank accounts have a lower interest rate than savings accounts.
- Savings and everyday expenses are combined – You may find it easier to stick to a savings plan if you have a separate savings account that you don’t dip into for day-to-day expenses.
- Returns are modest – Other investment options may yield better returns (although they also tend to be riskier).
What to look for when choosing a high-interest bank account
Not all high-interest bank accounts are created equal, so it pays to do some research and find one that can offer you the most value and savings potential over time. Here are three of the key considerations:
1. Introductory rates
Some bank accounts come with an offer of a high introductory variable interest rate for a set period. Once this period is over, the interest rate will default to the standard. Check how long the introductory rate applies (if there is one) and whether the standard rate is reasonable.
Some high-interest bank accounts come with account-keeping fees or transaction fees. If you choose an account with fees, make sure the benefits outweigh the costs.
3. Savings goals
Your savings plan and goals should dictate the type of high-interest bank account you choose. For example, if you are putting money aside for a year to go on a holiday, an account with a high introductory rate but lower standard rate might suit you. On the other hand, if you are saving for a house deposit over a few years, you may want to look for a long-term savings account with a more stable interest rate.
Take a look at RateCity’s high-interest bank account comparison tool to find an account that’s right for you.