A high-interest savings account is designed to incentivise you to save faster. By offering a higher interest rate than everyday transaction accounts, high-interest savings accounts can help you reach your savings goals, sooner.
What is a high-interest savings account?
A high-interest savings account is similar to an everyday bank account. The main difference is that it’s designed to help you save money by offering a higher interest rate than standard transaction accounts. Because high-interest rates are intended to help you save, not spend, they may incentivise you to make regular deposits. They also tend to limit the number of withdrawals you can make and may require you to maintain a minimum balance.
Depending on the account, high-interest savings accounts work by adding compound interest to the money you deposit. Compound interest is interest paid by the lender on the initial amount deposited as well as the accumulated interest on the money in the high-interest savings account. Compound interest can help accelerate your savings because you earn interest on the money you initially deposit, as well as the interest you’ve already earned. In essence, you’re earning interest on interest. Compound interest on high-interest savings accounts is calculated daily and paid monthly.
A high-interest savings account is generally linked to another bank account, within the same bank or to another bank. By linking an everyday account to a high-interest savings account, you should be able to transfer funds quickly between the two accounts.
When you’re comparing high-interest savings accounts, you might notice that some of the options listed are online savings accounts. These online savings accounts are high-interest savings accounts that you can apply for and manage via the internet. Unlike accounts from traditional banks, online accounts generally have fewer fees and higher interest rates because they have fewer overheads and bells and whistles. The other bonus is that because the account lives online, you can access your money 24/7 using internet banking.
In most cases, an online high-interest savings account will need to be linked to another transaction account, which can be either an external bank or the same bank. Be sure to check whether these accounts have any additional fees or charges.
Remember that any interest you earn from your high-interest savings account will need to be declared on your tax return. At the end of the financial year, you should get a statement or be able to access the amount through your internet banking.
What are the benefits of a high-interest savings accounts?
High-interest savings accounts are designed to help you save. The main benefit of a high-interest savings account is that these types of accounts tend to pay a much higher interest rate than other everyday transaction accounts. If you’ve got a goal in mind, this can help you get there faster. Depending on the high-interest savings account you opt for, some offer bonus interest rates if you meet specific criteria like not making any withdrawals. As an added incentive to open a high-interest savings account, some banks may offer an introductory bonus rate for an initial period.
Unlike other investments, high-interest accounts are a safe option because you don’t need to know anything about finance or investing. If you don’t withdraw any money from your high-interest account and you continue to make regular deposits, you can’t lose money on a high-interest savings account. Similar to term deposits, high-interest savings accounts are considered to be safe investments. In recent years, most banks and other regulated financial institutions are guaranteed by the Australian government. This means that if you deposit up to $250,000 into an account, the Australian government will guarantee that your entire balance is safe in the event that the lender collapses.
Because your high-interest savings accounts will be earning compound interest, you should be able to see your balance grow relatively quickly. This can act as an incentive to help keep your goals on track. The other advantage of high-interest savings accounts is that opening and closing the accounts is usually very quick and straightforward. Because you’re not locked into the account for any period, you can switch accounts at any time and potentially get a more significant return on your investment.
Before you lock in a high-interest savings account, be sure to do your research and compare from several hundred accounts to choose the right rate and return for you.
What to look for when comparing high-interest savings accounts
Like any bank account, there are certain things you will want to look out for before you make a decision.
When you’re researching high-interest savings accounts, the first thing you want to compare is the interest rate. Most high-interest savings accounts will offer an introductory or promotional interest rate which is usually higher than the standard interest rate. While this can be a great way to earn more interest, it’s often only for a limited period. Do your sums and check that when the promotional rate reverts to a standard interest rate, you’re still coming out on top. At the end of the day, it all comes down to your needs. If you’re looking to earn high interest over a short term, a promotional rate account might work for you. If you’re looking for an account that grows your balance consistently over time, then look for an account with a strong base rate as well.
High-interest savings accounts have variable interest rates which means they’re vulnerable to changes in the market. If you’re looking for a fixed return on your deposit, you may want to consider a high-interest term deposit.
Before you decide on an account, you might want to consider what features and facilities you need. If you opt for an online-only account, you may get a higher interest rate, but you won’t have branch or ATM access. If you choose a traditional bank, your account may have more features, but in all likelihood it will also have a lower interest rate.
You’ll also want to consider how often you’ll need to access the funds. Some high-interest savings accounts have certain conditions around how often you can withdraw funds. In some cases, you may forfeit bonus interest if you make a withdrawal.
When you’re comparing high-interest savings accounts, you also want to consider whether the account has any fees and whether you need to link the high-interest savings account to a transaction account with the same bank.
Alternatives to a high-interest savings account
High-interest savings accounts are great to earn interest while building your savings. The savings account you choose ultimately depends on your lifestyle and personal situation. If you’re looking for a fixed return and you don’t need convenient access to the funds, you may want to consider a term deposit. Term deposits range from 30 days to 10 years, and interest rates vary depending on the amount and length.
If you’ve got a mortgage, you may want to look into an offset account. In a nutshell, an offset account won’t earn you any interest, but it will save you interest on your home loan. Home loans tend to have higher interest rates than high-interest savings accounts, so before you open either account, do your research and work out what you’ll save versus what you stand to earn and see which works best for you.
How to apply for a high-interest savings account
Once you’ve compared which high-interest savings account suits your needs, applications can generally be made online. If it’s a more traditional bank, you may have to pop into a branch or apply over the phone. Whichever option you choose, you’ll need to provide personal information like your address, date of birth and contact details, your tax file number and details of the high-interest account you’d like to open.