Christmas accounts, The Scrooge of savings accounts?

Christmas accounts - The Scrooge of savings accounts?

How do Christmas savings accounts measure up to the best deals on the market? Chris Walker checks them out.

November 18, 2009

It’s that time of year when many of us wish we’d tucked some cash away for festive spending. A range of specially designed Christmas savings accounts are available but they can be more like Scrooge than Santa Clause.

Research by ING Direct showed the average Aussie household spends around $1,300 on Christmas purchases. With that sort of money involved, many families are left scratching for cash or racking up purchases on high interest credit cards.

A number of institutions, typically credit unions, offer Christmas savings accounts designed to help us save for the festive season. These accounts usually accept deposits throughout the year but the accumulated balance can only be withdrawn between November and December, just in time for the silly season.

The fact you have to keep your money in these Christmas accounts until close to the end of the year is a key feature – it prevents you raiding the honey pot in the meantime. However, the interest your money will earn often looks like something dished out by Ebenezer Scrooge. The top paying Christmas savers listed on RateCity are offered by Australian Defence Credit Union, ECU Australia and Circle Credit Co-op, with each of these accounts paying interest of just 2.5 percent p.a.

If you can resist the urge to dip into your savings before Christmas, it’s possible to earn a much higher rate of more than 5 percent p.a., with the likes of UBank‘s Usaver (5.46 percent), ING’s Savings Maximiser (5.25 percent) and Westpac‘s Reward Saver (5.2 percent). These accounts may include bonus rates that only apply for an introductory period but in most cases the ongoing rate is still higher than the 2.5 percent you’ll earn on a Christmas saver.

To see the difference a more generous rate can make, let’s assume you open a Christmas savings account in January with an initial deposit of $100. Add an extra $20 each week, and with a rate of 2.5 percent by the time Christmas comes around, the accumulated balance would be around $1,420, slightly more than the average we each spend on holiday season purchases.

If the same savings pattern is followed with an account paying 5 percent interest, at the end of 12 months, the balance would be about $1,440, providing an extra $20 to spend on turkey and trimmings. Okay, $20 is not much, but every dollar counts. Choosing between a special Christmas account and a higher paying savings account probably will come down to deciding how much willpower you have – to dip into your money before the tinsel goes up.

While the rates offered by Christmas savings accounts aren’t high, they are a far better alternative than overloading your credit card. Putting an extra $1,400 worth of purchases on a card charging 18 percent could mean paying an additional $250 in card interest over the following year. Looked at this way, Christmas savings accounts don’t seem so Scrooge-like after all.

 

 

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Learn more about savings accounts

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.

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

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 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 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.

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.

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.

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.

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.

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 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.

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 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.