Rising food costs make dents in your savings

Rising food costs make dents in your savings

Want to learn the smart way to dodge hefty grocery bills? Jack Han reports.

November 25, 2009

Australian food prices are rising faster than any developed nation, according to recent Organisation for Economic Co-operation and Development (OECD) figures. This puts the pressure on Australian households to avoiding letting their grocery shopping damage their savings accounts.

According to the OECD report, Australian food prices have increased 41.3 percent since the beginning of 2000. This is the highest jump recorded, with Spain following with the next fastest price growth over the decade at 41.2 percent.

The UK ranks third at 32.9 percent, while Canada (32.7 percent), Italy (29.7 percent) and the US (28.4 percent) trailed behind.

While experts are criticising our “cosy” supermarket duopoly, Woolworths argues that competition is very healthy in the Australian market.

“We actually think the Australian market is very competitive,” said Woolworths representative James Aylen in an interview with the Seven Network. “We know the ACCC had their inquiry last year and they certainly found it to be competitive as well.”

However, with the canning of Grocery Choice, the consumer group initiative, in June by the Government, it is difficult for consumers to measure competitiveness or compare prices. Households have instead had to rely on traditional means such as saving dockets and waiting for discounts to save on hefty grocery prices.

But the smartest shoppers have realised the importance of savings accounts, and have started to subsidise their monthly grocery costs with interest payments from their savings.

For example, if you put your savings into today’s best savings accounts of up to 5.46 percent, $50,000 saved up would return about $227 in interest every month which is equivalent to about $57 a week. Therefore, if your groceries are normally $100 a week, you could save more than half the cost (before tax).

This strategy could mean sacrificing your spending on a holiday or a deposit on a home loan. However, with interest rates on the rise, and grocery prices hitting every shopper, more and more Australians are happy to enjoy the high interest payments now, rather than collect more debt.

Rising grocery prices are bad news for any household, but that doesn’t mean you should yield to the supermarket giants. Use and build your current savings with a high interest savings account to begin collecting interest, and you could be enjoying a free carload of groceries every week.

 

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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

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 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 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. 

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.

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.

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.

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 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

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.