Online or old-fashioned savings accounts: What's best for you?

Online or old fashioned savings accounts What's best for you?

Andrea Sophocleous investigates what makes a savings account the best fit for you.

December 1, 2009

Since the introduction of the first online savings account by ING Direct in 1990, Australians have taken to online accounts like ducks to water. Over one million Aussies have an ING Savings Maximiser account, and plenty more have opened online high interest accounts with the likes of the big four banks and other players, such RaboPlus.

“Currently 52 percent of the Australian adult population claim to prefer using direct channels to conduct banking activity,” says Gerd Schenkel, general manager of UBank, the online banking arm of NAB. “The direct banking market has experienced significant growth over the past five years and we estimate it to grow at 10 percent p.a. for the foreseeable future.”

The Commonwealth Bank (CBA), Australia’s largest bank, is also enjoying success with its online savings account, NetBank Saver, introduced in 2005. “NetBank Saver is definitely our strongest product,” says CBA chief marketing officer Mark Buckman.

“It grew by 50 percent in the past 61 weeks [to the start of November 2008], and contributed about 75 percent of the overall growth in savings.”

For customers, the benefits are obvious: lower overheads for the financial institutions translate to lower fees, or usually no fees at all. The interest rates are also generally higher than “old-fashioned” savings accounts, for the same reason.

And there is no doubt online accounts can help you save faster as they offer the highest interest rates on the market.

The good news is that from January 22, 2010, NAB will scrap the monthly account fee on 12 of its transaction and savings accounts, including its Classic and e-Banking accounts. At an average of $5 per month, you’ll end up with an additional $60 a year in your pocket.

Nevertheless, to work out if an online account suits your needs, you must consider its restrictions.

For starters, making withdrawals are discouraged – it can negatively affect the interest you earn. Online accounts also have to be linked to a transaction account, from which to draw regular deposits. And again, the only way to access the money is to transfer it back to the linked account. ATM facilities and branch access are not generally part of the online world.

You should also be aware of bonus and introductory rates. Banks use “bonus” rates to lure new customers to their online savings products, but these generous rates are purely a wooing tactic and do not last long. When you are researching your savings options, look at each bank’s average interest rates for a more accurate picture of its generosity.

 

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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 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 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 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.

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.

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 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.

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.