The age of online savings accounts

The age of online savings accounts

By Lynne Blundell
September 4, 2009

We’ve become so used to thinking of banks as one homogenous mass that we’re at risk of missing the opportunity to cash in on the differences. And when it comes to savings accounts these differences can really add up.

The variation in fees and interest rates between different savings accounts is considerable. This applies not only when you compare a traditional savings account – or transaction account – with an online product but also for each online savings account within the sector.

Damian Smith, chief executive officer of RateCity says banks are a lot more competitive, particularly with interest rates, than people think.

“When you look at the spread there is an enormous difference in the interest rates of savings accounts. Some are below four per cent and others are well above that.

“An interest rate of 4.5 percent compared to 3.5 percent can make a huge difference over two years. It can add hundreds of dollars to your savings,” says Smith.

Online products pushing competition
Online savings accounts have brought a new level of competition into the savings account sector. The reduced need for interaction with customers and lower overheads has allowed online accounts to offer higher interest rates and reduce fees, or completely remove them.

This has forced banks to become more competitive with their traditional savings accounts and has also seen a massive increase in new online offerings.

Smith says this proliferation of online savings accounts is only going to increase, particularly as younger generations expect to be able to conduct all of their business over the internet.

“Some customers, typically younger people, want to handle all of their transactions online. But while a big chunk of banks’ business is going to be online there are still some things you need to go to the bank for and there will also be people who prefer a traditional account,” says Smith.

The trick when choosing a savings account is to think about how you need to use it.

Most online accounts are linked to an everyday transaction account and require you to transfer your money across to access it.

This can take up to four business days so if you want regular and immediate access to your money, this option may not suit you. Most don’t have ATM access or cheque facilities.

But if you are interested in parking some money in an account and adding to it regularly, online savings accounts with higher interest rates can allow you to save more, faster.

How big are the savings?

The benefits of shopping around are clear when you look at a simple scenario. By using the interest rate comparison on RateCity we can compare the results of putting your money into two online accounts.

The USaver account from UBank is offering 5.11 percent p.a. interest. If you were to deposit an initial $10,000 and add $1,000 each month to the account, after one year you would have about $22,808.

If you were to compare this to a savings account with a 4 percent p.a. interest rate, you would have returned about $178 less.

If you then compare this to a transaction account offering 1 percent p.a. interest the difference is even more dramatic – at the end of the year you will have $22,156.

Just by shopping around and changing from a traditional savings account to an online account you can add about $652 to your savings.

Read the fine print
Of course there are other factors to consider when choosing your account. Some online accounts may require a minimum deposit and some offer the best of both worlds – high interest rates as well as ATM access and cheque facilities.

Key factors to look for when choosing an online account are:

  • Are there any account keeping or other fees?
  • Is there a minimum balance required?
  • Are there any extra features such as ATM access and cheque facilities?

Smith advises it is important to read the fine print of the account’s terms and conditions even if the high interest rates look particularly attractive.

“A database like ours can check all the features and compare rates and this plays a very important role in helping Australians make informed decisions.

“But there is no substitute for reading the detail. Each person must make sure the features of the product suits them and that can only be found in the fine print,” says Smith.

 

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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 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 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.

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 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.

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 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 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.

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)