First home or holiday: Money management with savings priorities

First home or holiday Money management with savings priorities

Amy Bradney-George investigates how to reach your savings goals by effective prioritising and savings account management.

September 7, 2009

The way Australians prioritise their savings goals can speed up or slow down how soon you reach the finish line.

When people end up juggling more than one savings target, the easiest way out is to give one goal a higher priority.

A recent Sallie Mae and Gallup study in the US reported most people put saving for retirement over saving for their children’s education. Both of these are long-term goals, but one has to come before the other for effective financial management.

Figuring out your savings priorities creates a blueprint for a realistic and achievable savings plan to help keep your goals achievable.

The long and the short of it
The first step is to consider what you are currently saving for, both in the immediate and distant future, and how much importance is placed on every goal.

In most cases there will be a combination of short-term and long-term targets and the two scenarios below show how to manage different savings timeframes effectively.

1. Saving for a second car and saving for a home
A couple living together want to buy a second car so that they can both get to work easily, but have just decided to save up for a home. Their combined annual income after tax is $80,000 and they save $1,333 per month towards a home loan deposit, which is about 20 percent of their income.

If they increased their monthly savings amount by $333, an extra $83.25 every week, they could split the monthly savings into $1,000 for a car, and $666 towards the home loan deposit.

In 10 months they would have enough to buy a decent second car, and could continue to save $1,666 per month towards their home.

By continuing to save $1,666 monthly it would take one year and eight months for them to get a 10 percent deposit for a $400,000 home, and about three years and eight months if they wanted to put a 20 percent deposit on the home loan.

If they had decided not to buy a second car and saved the initial $1,333 per month for a home loan it would have taken them about 2.5 years for a 10 percent deposit and five years to save 20 percent for their home loan.

In this case increasing the savings amount slightly, and splitting it up between short and long-term goals, ended up reducing the time it would take to save up for a home.

2. Saving for a holiday and saving for renovations
A hard-working investor has decided to renovate a property she owns, but is also planning to go on a two-week holiday for a family reunion in six months time.

In 2006 the Housing Industry of Australia calculated the average cost of major renovations to be $84,381, and from this she has estimated it will cost her around $60,000 to do the renovations needed for her house.

She would also like to have at least $8,000 for her holiday, and calculates that she can manage saving $450 every week. If she put $350 per week towards her holiday she would save $8,400, and also have $600 for her renovations.

With only a small percentage of the renovation amount saved, she continues saving at $400 per week and ends up with $10,200 at the end of a 12 month period. At this rate it takes her about two years and five months to save enough to complete the renovations, allowing her to refine her plan for the home and get more accurate quotes.

The means to an end
Whether the goal is a holiday, a car or retirement, prioritising your savings will help make your savings goals realistic and achievable. The amount of time needed for long-term goals can also be significantly reduced by finding a high interest savings account to suit your needs.

It’s also worth thinking about what the best way to save will be, because while having one account for all your savings goals could well increase the amount of interest you get, having separate accounts will help keep your goals focused. Whatever the decision, you can get ahead much faster by thinking about how to prioritise your savings.

 

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Learn more about savings accounts

Can you have multiple ING savings accounts?

Yes, you can open up to nine accounts with ING at any particular time. If you’re saving money for various goals, such as buying a car or taking a holiday, you can name each of your multiple ING savings accounts differently.

To get a Savings Maximiser account, you’ll need to deposit more than $1000 every month and make at least five additional purchases. If you also want to grow your savings, from 1st March 2021, you can earn up to 1.35 per cent per annum variable interest on one account with a balance of up to $100,000 when you also maintain an Orange Everyday account.

With ING, multiple savings accounts can help keep track of all your savings goals. All the accounts offer flexible withdrawals where you can withdraw as low or as high as you want without impacting your earning interest rate. However, you can only earn the bonus interest on one account. To apply for a Savings Maximiser account, you can visit ingdirect.com.au.

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. 

What is an ANZ locked savings account?

An ANZ locked savings account locks your money and prevents you from spending. You may use a standard savings account as the account where your salary is deposited. You can then withdraw funds when needed, but aren’t able to make purchases with it. However, this account may not grow much as the continual withdrawing of funds will limit the interest you can earn.

With a locked savings account in ANZ, you know your savings will grow because you can’t access the money. You can also qualify for a bonus when you deposit at least $10 per month and don’t make any withdrawals. To help you with this further you can set up an automatic transfer from your regular ANZ savings or transaction account so you don’t forget to make a monthly deposit.

Your ANZ locked savings account offers you a base interest rate of 0.1 per cent per annum plus an additional bonus interest of 0.49 per cent per year. The interest is calculated daily and credited to your account on the last working day of the month.

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

  • Depositing a fixed minimum amount into the account every month.
  • Making a fixed number of deposits each month.
  • Making a minimum or no withdrawals each month.
  • Maintaining a minimum account balance.

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 Westpac locked savings account?

The Westpac locked savings account (also known as "Westpac Life") can help customers reach savings goals faster through bonus interest. Customers receive 0.2 per cent standard base interest with a variable bonus rate of 0.35 per cent when the closing balance at the end of the month is higher than the opening balance.

There are some conditions to earn the bonus interest on Westpac's locked savings account, though. First, you’ll need to increase the balance each month either through a deposit or not making any withdrawals, and then link it to a Westpac Choice account and make at least five eligible payments using your debit card. Please consult your bank as to what an eligible payment is. 

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.

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.

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 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.

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 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 are the two types of NAB locked savings accounts?

With a locked savings account in NAB, you can earn bonus interest and learn financial discipline. NAB offers two types of locked savings accounts, each with their own terms and conditions.

The NAB Reward Saver account pays a variable base interest rate of 0.05 per cent per annum and a bonus interest of 0.55 per cent. You’re eligible for the bonus if you make a minimum of one deposit on or before the second last banking day and have no withdrawals in the month.

Meanwhile, the NAB iSaver account provides 0.05 per cent as the standard base interest rate and a fixed bonus margin of 0.55 per cent during the first four months from the date of opening the account. You can park your cash in the account and enjoy unlimited monthly transfers between linked daily bank accounts without impacting the interest rate.

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.