Don't let the banks steal your savings!

There are tricks banks use to pay less interest on your savings. Jackie Pearson looks at the top five interest rate tricks and how can you get around them.

December 1, 2009

Not all saving accounts are equal. When it comes to how they calculate and pay interest, it’s definitely worth checking the terms and conditions before you open a new savings account.

There are several techniques and structures that some banks use, particularly on more traditional savings accounts that can result in you earning less interest than you’d like to. Here are the top five interest rate tricks to look out for.

  1. Layer by layer

Traditional savings accounts have layered interest rates. They usually start with a base rate and then you can earn bonus interest if you adhere to the terms and conditions that come with the account. You may only be entitled to earn the higher bonus interest rate if you deposit a certain amount each month and make no withdrawals for instance. Another variation is that you have to maintain a minimum balance in the account before you’re entitled to any bonus interest.

For example, BankWest‘s Solid Gold Saver is a cash management style account with a competitive rate. However, for each withdrawal you make in a month that rate is reduced by a whole 1 percent. Make four withdrawals in a month and you’d earn no interest.

  1. Limited time only

Although online savings accounts pay higher interest and have fewer terms and conditions than most other types of deposit accounts, there are still tricks used to limit your ability to earn maximum interest.

The main trick is the handsome introductory interest rate that only lasts for a limited time period and then reverts to a much lower rate.

  1. Threshold too high

Some traditional savings accounts and cash management accounts only pay a worthwhile rate of interest once your balance climbs, and stays, above a very high level. If your balance falls below that level you can find yourself earning very little, if any interest.

  1. Interest versus features

One reason to bother with a cash management-style account is that it will usually have more features than an online account. This trade-off between features and interest is another trick employed by the banks to keep your money out of the accounts likely to earn you the highest rate of interest.

If you want branch access, for example, you will have a much more difficult time finding an attractive interest rate than if you’re happy to do all of your transacting over the phone or internet.

  1. Sneaky fees

The other trade-off savers are often forced to make is between fees, features and interest.  The more service you want, the higher the fees you’ll pay and the lower the interest you will earn. Your bank would argue that this is a “user pays” approach that enables them to keep their expenses under control but if you’re serious about getting your savings account balance as high as possible you may have to be prepared to trade off features and service.

 

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Learn more about savings accounts

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

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.

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 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.

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.

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.

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.

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 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 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.

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