Did your savings account cause the financial crisis?

Did your savings account cause the financial crisis?

Jack Han investigates how to boost your income without lifting a finger.

November 18, 2009

One of Australia’s leading experts in the nation’s finance thinks that there’s one simple thing that all Australians can do to avoid another global financial crisis: save more. While it’s easier said than done, taking away a few pearls of wisdom could help you boost your income with savings account incentives.

Westpac CEO Gail Kelly put forth recently that if we all had more money stored away in savings accounts, Australia could have escaped the global financial crisis.

“We are a very highly indebted country – on average we borrow twice what we save,” said Kelly.

To avoid another financial crisis, she said “we need to incentivise and drive additional savings as a nation.”

The consequence of low savings levels means that major banks will need to raise additional funds from international markets, which makes Australia more and more vulnerable to financial busts.

With 82 percent of all Australians keeping their savings in one of the big four banks – ANZ, Commonwealth Bank, NAB, Westpac – our savings choices will likely have a major impact on their borrowing habits.

Kelly suggested tax cuts as a way of boosting the incentive to save, which she proposed as a consideration in the Federal tax review due to report to the Government next month.

While the government is called on to help, banks themselves are also offering more competition to provide extra incentives. UBank’s USaver gives an impressive 5.46 percent p.a., while the ING Direct Savings Maximiser has reached new heights of 5.25 percent p.a.

So how can you reward yourself for saving? A simple incentive is to take away the temptation to withdraw. For example, by putting away a certain amount into a high interest online savings account (internet account) after every pay check and leaving the rest in a transaction account, you can avoid the temptation of spending your earnings right away.

It’s also important to see where your savings will take you. Let’s assume that you want to save twice as much as you spend, to put away two-thirds (66 percent) of your income. On an average salary of $48,000, you will need to save $2,640 a month.

With an interest rate of 5.46 percent p.a., your savings could earn you over $23,200 in just five years. This would boost the average income to $52,640 per year!

Think about savings as an extra income, and start shopping around for the best deals today. Within years, you would have helped the whole economy, and also rewarded yourself with a small savings fortune.

 

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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.

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.

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 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.

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

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 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.

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.

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

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 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.