Australia's worst savings accounts

Australia's worst savings accounts

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.

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Learn more about savings accounts

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.