Savings accounts are one of the simplest yet handiest financial products around. A savings account can help you build wealth, while also providing fast, easy access to your money.
The other good thing about a savings account is that it’s a safer way to store your money than hiding it under your mattress.
Also, 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.
What is a savings account?
A savings account is a bank account where you deposit your money in exchange for interest.
Why do banks pay interest?
Banks pay interest to encourage people to ‘lend’ them their money. The reason banks want these deposits is so they can use this money to fund their activities. For example, a bank might attract savings from one consumer by offering them 2.50 per cent interest – and then charge another consumer 4.75 per cent interest to access that money through a home loan. Just like retailers, lenders buy products for a lower price and then sell them for a higher price.
How is interest calculated?
Generally, interest is calculated daily and paid monthly.
What is a good interest rate?
Lenders change their interest rates all the time, so an interest rate that is market-leading at one point in time might become substandard at another point in time.
For example, in a low-interest rate environment, it might be impossible to find an interest rate above 3 per cent. However, 12 months later, the market might have moved to such an extent that now most lenders offer rates above 3 per cent.
Why do lenders change their rates? There are two main reasons:
- Because the Reserve Bank of Australia changes the official cash rate
- Because wholesale funders change the price they charge lenders to buy money
Who has the highest interest rates?
The savings account market is very competitive, because Australia has about 150 authorised deposit-taking institutions fighting for your business. As a result, it’s impossible to say who pays the highest interest rates, because a lender that pays below-average interest today might feel it will lose market share unless it pays above-average interest tomorrow.
An online comparison search is a quick and easy way to find out how the market looks at any given moment. For example, a RateCity savings comparison search allows you to compare the interest rates of several hundred products.
Another point worth bearing in mind is that advertised interest rates can be misleading. Lenders like to entice consumers by flashing the highest possible number in their face. But this interest rate might be available only if you meet certain conditions, such as:
- Depositing a certain amount of money into your savings account each month
- Making minimal withdrawals (or even no withdrawals) from your savings account each month
- Keeping the balance of your savings account above a certain amount
- Using another of the lender’s products, such as a credit card
Many lenders also use a ‘bait and switch’ tactic, by offering bonus interest for the first few months of the loan. That allows them to lure you in with the promise of a higher interest rate, before moving you, after, say, three months, onto a lower interest rate.
How do you open a savings 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 identification and contact details, as well as your tax file number if you don’t want to be taxed at the maximum rate.
What are the best ways to use savings accounts?
Savings accounts work best when they help you maximise your savings. So, ideally, you want to choose a savings account that:
- Pays maximum interest
- Charges minimal fees
There are two common mistakes people make with interest. First, they become so fixated on interest that they ignore fees, which can be surprisingly high. Second, as explained above in ‘Who has the highest interest rates?’, they don’t realise that they might not qualify for the advertised interest rate.
One tactic that some people use to get the most out of their savings account is to pair it with a transaction account and then have their salary paid into these two accounts:
- The share that’s paid into the transaction account is used for bills and day-to-day living
- The share that’s paid into the savings account is left untouched
This tactic is most successful when you almost forget about the money being diverted into the savings account. That’s because the less you think about the money, the less tempted you are to spend it, and the faster your savings grow.
At the same time, many people want their savings account to allow them fast, easy access to their money. This could be to help them respond to an emergency, or because they need the money to fund a major purchase, such as a property or a car.
What are the worst ways to use savings accounts?
The worst thing you can do with a savings account is to manage it in such a way that it minimises rather than maximises your savings.
With that in mind, make sure you pay close attention to the fine print associated with the interest rate. Some people are shocked when they sign up for a savings account and find themselves earning less interest than was advertised.
How is this possible? Well, first, some accounts pay bonus interest for the first few months of the account. This bonus rate is actually the advertised rate; when the bonus period ends, customers get moved onto the lower standard rate – a change that is often buried in the fine print.
A second trick some lenders use is to force you to jump through hoops if you want to earn the advertised rate. For example, you might have to increase your account balance by a net $200 each calendar month and/or make no more than one withdrawal per month and/or use a linked debit card at least once per month. If you don’t, you own a lower rate instead.
Finally, another way some people misuse savings accounts is, ironically, to store too much money there. Savings accounts often deliver lower returns than other investments, so once your balance reaches a certain amount, it might be worth considering whether you should withdraw some of the money and invest it elsewhere. That said, it can be a mistake to withdraw too much money. That’s because it’s important to have quick access to a pool of money that can see you through any emergencies, such as losing your job or suddenly being hit with a large bill.
Can you have a joint savings account?
Many lenders offer joint savings accounts, which give two or more people access to the one account.
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, because they will be able to withdraw any money you deposit in the account.
How safe are savings accounts?
No financial product can ever be 100 per cent safe, but there are three reasons why an Australian savings account is as close to perfectly safe as you can get.
First, Australia has a stable economic and political environment. Second, it’s been years since an Australian lender collapsed – the last one being the State Bank of South Australia in 1991. Third, the federal government has promised to support consumers if and when another lender does collapse.
Under the Financial Claims Scheme, the government protects the first $250,000 of any money you deposit at a licensed bank, building society or credit union incorporated in Australia.
However, if you deposit $300,000 with a lender and that lender collapses, the government guarantee will only cover $250,000 of your savings, not the other $50,000. Another point worth mentioning is that while the Financial Claims Scheme is currently in operation, it’s possible that the government might close it at some point in the future.
Are there savings accounts for children?
Yes, there are savings accounts just for children. Compared to adult accounts, children’s savings accounts generally have:
- Higher interest rates
- Lower fees
Should I open a savings account for my child?
Children’s savings accounts can help teach your child basic financial literacy.
For example, your children can gain an understanding of the banking system and learn how to save money.
They might also gain their first exposure to the Australian Taxation Office (ATO). That’s because the ATO has created rules to stop parents using their children’s savings accounts to evade tax.
Children who are aged 17 or under don’t have to pay tax on any interest they earn from a children’s savings account. However, they might still be required to provide the lender with a tax file number. Otherwise, the lender might withhold pay-as-you-go tax at a rate of 49 per cent, and they would need to lodge a tax return to claim a refund.