Savings accounts: Should I stay or should I go?

Savings accounts Should I stay or should I go?

When is it wise to switch savings accounts and when should you simply stay put? Jackie Pearson examines your options.

December 1, 2009

Your savings are the cheapest source of money that our banks can get their hands on, so expect “robust” competition to continue, particularly in the area of online and “serious” savings accounts.

The dilemma is what to do when you open your Sunday paper and find a savings account advertisement with a headline rate substantially higher than the one you are currently earning. When is it prudent to switch to an account with a higher rate?

Just too messy?
One factor is to consider how bundled and complex your banking is. If, for example, you have a packaged home loan with an offset account, and fee and insurance discounts, it may be better to stay put.

But the emergence of online savings accounts means it is easier to direct some of your savings dollars at no fee/high interest offers. The ease of internet banking means brand loyalty just isn’t as important as it used to be.

Accounts by type
Historic data from the Reserve Bank of Australia (RBA) shows that some types of savings vehicles tend to sustain a better deal than others over time. Since 2004 online savings accounts, as a group, have consistently outperformed bonus saver accounts, cash management accounts (CMAs) and one-year term deposits for balances of $10,000.

On average, online savings accounts have paid 1.71 percent higher interest than bonus saver accounts since January 2004. There have been times (2004 and 2005) when the margin between online and bonus savings accounts has been higher than 2 percent.

CMAs have been the poorest performing account type during the past five years. Online savings accounts have paid, on average, 2.2 percent more interest than CMAs.

At times (2006) the margin between online accounts and CMAs has crept higher than 3 percent. That’s a substantial difference in how hard your money is working for you – the difference between your money keeping up with or falling behind inflation.

Study the fine print
Of course, you then have to figure out which term deposit or online account is best. Consider features, fees and how much access you want to have to your money.

Term deposit rates will also tend to “take the lead” over other account types when it comes to interest rate trends because the advertised rate is locked in for the whole year so there’s a bit more guess work involved in picking the best time to lock your money up.

Based on interest rate trends over the past five years, the good earners seem to be online savings accounts and one year term deposits. If you have stuck with your old CMA or bonus saver throughout the online savings revolution, it may be time to cut your losses and join the new millennium.

 

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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.

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 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.

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 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.

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.

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.

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

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.