Can a savings account help you grow wealth?

Can a savings account help you grow wealth?

With interest rates on savings accounts at historic lows, many Australians with savings goals are probably wondering if they can still grow wealth through them.

However, as rates continue to slide below the rate of inflation, the outlook is not too optimistic for savers at the moment.

So, can a savings account still help you to grow wealth? And if not, what other options does your bank offer to help you earn a return or make money from your savings nest egg?

How far rates have fallen

The Reserve Bank of Australia (RBA) has cut the cash rate five times since June 2019, including one emergency cut mid-March in response to the economic impacts of the COVID-19 pandemic.

The cash rate currently sits at 0.25 per cent, and RBA Governor Philip Lowe has indicated they have no intention of cutting this further any time soon. However, there’s no way of telling just how long COVID-19 will continue to affect the economy, so it’s also difficult to say when rates may rise again.

RateCity research shows that since June 2019, the average savings account rate has fallen from 2.66 per cent to 1.43 per cent for introductory savers, and 1.55 per cent to 0.66 per cent for conditional savers.

As the cash rate is an influencing factor to what interest rates bank will set to not only savings accounts, put simply, a low cash rate means a low return on your savings.

How different account types boost your savings

There are two main types of savings accounts: introductory savers and conditional savers:

  • Introductory savings accounts typically offer some of the highest rates on the market, but only for a fixed period – typically a few months.
  • Conditional savings accounts offer low to high interest rates that can only be earned if you meet certain conditions on the account, such as depositing a minimum amount each month or making no withdrawals.

As interest rates continue to drop, one way to try and boost your wealth with a savings account is to switch between the highest rate savings accounts. This is typically done by introductory savings account hopping, as they generally offer higher rates with no strings attached than conditional savings accounts.

There are no rules against switching between high-rate accounts at the end of each introductory period. It is just generally considered a bit of a hassle, especially if the savings account is linked to a transaction account that you’ve set direct debits to come out of.

RateCity research shows that over the last year, introductory accounts on average offer higher interest rates than conditional accounts (not including kids or pensioner accounts).

Further, when comparing the highest rates offered by introductory or conditional savings accounts over the last year, introductory accounts also offer higher rates. The exception being this month, with a conditional Westpac savings account coming out on top.

Average interest rates - introductory vs. conditional savings accounts:

 

21/7/19

21/10/19

21/1/20

21/4/20

21/7/20

Avg conditional rates

1.31%

1.07%

0.91%

0.71%

0.66%

Avg intro rates

2.40%

2.05%

1.93%

1.66%

1.43%

Which comes out on top

Intro Accounts

Intro Accounts

Intro Accounts

Intro Accounts

Intro Accounts

Source: RateCity.com.au. Notes: based on average balance of $25k. Does not include child or pensioner accounts. Data accurate as at 22.07.2020.

Highest interest rates - introductory vs. conditional savings accounts:

 

21/7/19

21/10/19

21/1/20

21/4/20

21/7/20

Highest conditional rate

2.75%

2.50%

2.25%

2.00%

3.00%

Highest intro rate

2.85%

2.65%

2.65%

2.65%

2.25%

Which comes out on top

Intro Accounts

Intro Accounts

Intro Accounts

Intro Accounts

Conditional Accounts

Source: RateCity.com.au. Notes: based on average balance of $25k. Does not include child or pensioner accounts. Data accurate as at 22.07.2020.

Rule of inflation

As a rule of thumb, you may want to try and keep a savings rate above the rate of inflation – currently sitting at 2.2 per cent. This can mean the difference between simply parking your money in a safe account and earning real interest on it.

However, only one conditional savings account still offers interest above 2.2 per cent. Westpac’s Life savings account has a rate of 3 per cent, but only those aged 29 and under can apply.

Further, only one introductory account offers a rate above inflation. Rabo Bank High Interest Savings Account has an interest rate of 2.25 per cent for four months.

This unfortunately means that it is now extremely difficult to earn any real interest on a savings account.

What other wealth growth options are there for savers?

There are a few other ways you can try and grow your wealth, with some features potentially offered by your bank already. You may just have to switch them on.

One way banks can help you boost your savings with little effort is through everyday round-up programs. There are handy features that will ‘round up’ any spending you make to the nearest $1, $5 or $10 and deposit it directly into your savings account. ING is one example of a savings account provider who has an Everyday Round Up feature.

For example, if you bought a $3.50 coffee and had the round-up feature set to $5, it would transfer $1.50 directly into your savings. That may seem small, but if you did this every day, after a year you’d have an extra $547.50 in your savings nest egg you’d otherwise never have had.

Some transaction accounts, like Commonwealth Bank’s Smart Access, also offer a feature called a ‘sweep facility’. If you set a minimum and maximum limit on your transaction account, this feature automatically ‘sweep’ and transfer funds to and from your linked savings account.

If your bank does not offer these features, there are a range of fintech apps on the market that can not only round up your spare change into your savings account, but may also invest it for you or pay off your debt, including:

  • Raiz – automatically invests your spare change into a diversified portfolio.
  • Qapital – allows you to set fun rules and goals when rounding up your spare change.
  • Qoins – automates extra repayments towards your debts and creates savings for you in $5 increments throughout the month.

Unprecedented times may call for unprecedented measures. If you’ve never thought about your savings account rate before, or if you’ve never thought of using fintech to boost your nest egg, now may be the time to do so.

Did you find this helpful? Why not share this article?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about 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 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.

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.

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

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.

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 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.

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 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 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 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 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.