Saving in a low interest environment

Saving in a low interest environment

Australians are increasingly looking beyond term deposits, let alone a savings account, for their savings needs. 

The latest statistics from Roy Morgan’s Consumer Single Source Survey show that term deposit customer numbers have fallen by two percent over the last year. This is largely due to the low interest rates which currently characterise Australia’s financial markets.

Term deposits have traditionally been attractive for investors, allowing them to save more than through a simple savings account by depositing cash for a fixed period of time, and reaping the benefits of interest when they are allowed to withdraw it back. The ongoing low interest rates and official cash rate, however, have pushed investors elsewhere.

“The decline in term deposit rates over the last two years has encouraged customers and banks to look at other products that can offer a better return as well as other benefits including flexibility, access etc.,” Industry Communications Director at Roy Morgan Research, Norman Morris, said.

High interest online accounts the most popular

When looking for a high interest savings account, more and more Australians are choosing high interest online accounts, Roy Morgan revealed. 

High interest online accounts saw solid growth at nearly all of the big four banks. Such accounts saw an increase of 102,000 owners over the previous year, putting the total number of high interest online account-holders in Australia at 5.88 million. This makes them the most popular type of savings account. 

Bonus interest/reward saver accounts see a surge

Bonus interest accounts, also known as reward saver accounts, were the big winners of the trend. This type of account experienced a massive increase of 709,000 in customer numbers since last year to a total of 4.55 million in March 2014.

These accounts offer an extra interest rate on top of the existing base interest rate, which can go a long way to help you save money. However, these accounts will typically add strict conditions onto being able to profit from this bonus interest rate, such as not making withdrawals or having to deposit a select amount in a fixed period. 

This makes bonus interest accounts attractive in a low interest scenario, but may not benefit everyone. Such accounts would not work as well for those who like to have flexibility with their savings accounts. 

Mortgage offset accounts also grow

Mortgage offset accounts saw the second highest increase in the preceding year, growing by 181,000 to 1.43 million. 

Also called home loan offset accounts, such accounts link a transaction account to a home loan which can be used as a regular savings account. Any money credited to this account will be offset against the value of the mortgage, meaning that when the mortgage accumulates interest, it won’t be on the full total. 

This can make the mortgage offset account an attractive savings option for those wanting to take pressure off their home loan repayments while saving a bit of money. 

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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.

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

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.

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 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 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.

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 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 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.

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.