Australians saving about a fifth of income as country bounces back from recession

Australians saving about a fifth of income as country bounces back from recession

The country bounced back from a quarterly loss comparable to The Great Depression, but Australians are still being cautious and saving nearly 20 per cent of their income.

The economy grew by 3.3 per cent in the September quarter, according to the Australian Bureau of Statistics (ABS), bouncing back from the 7 per cent drop that took place a quarter earlier, and offering some hope that the worst of the economic fallout from the COVID-19 pandemic has passed.

“Technically, Australia’s recession may be over but Australia’s economic recovery is not,” Treasurer Josh Frydenberg said.

“There is a lot of ground to make up and many Australian households and many Australian businesses are doing it tough.”

The recovery was bolstered by a 7.9 per cent lift in household consumption, Mr Frydenberg said, the largest lift on record.

Returning confidence to a stalled housing market also helped, he said. Dwelling investment was up by 0.6 per cent following eight consecutive quarterly falls, spurred on by a 5.1 per cent lift in construction and renovation work.

“The outlook for the housing market is positive,” Mr Frydenberg said, “supported by programs like HomeBuilder and the First Home Loan Deposit Scheme.”

Unemployment remains high, hovering at around 7 per cent as opposed to its typical 5 per cent, but the Reserve Bank of Australia (RBA), the nation’s central bank, has said the country has bested projections.

“We have now turned the corner and a recovery is underway,” Philip Lowe said, Governor of the RBA.

“... When we met three months ago, I was saying the unemployment rate in Australia could get to 10 per cent. Now I think somewhere in the sevens will be the peak.”

Still nervous about the pandemic, people are saving a lot more

In the March quarter, the household savings to income ratio was 7.6 per cent, according to the Australian Bureau of Statistics (ABS).

But people have been choosing to save more and spend less since the pandemic, causing the ratio to lift to 22.1 per cent for the June quarter, and then ease a little to 18.9 per cent for the September quarter.

“At times of uncertainty, people save more,” Mr Frydenberg said.

“Importantly, as the restrictions are being eased, as confidence is coming back, Australians will continue to spend and that money … is money there to be spent in the coming months.”

The current level savings to income ratio exceeds the 10.9 per cent registered during the Global Financial Crisis (GFC).

We’re saving more but earning less

Money in savings accounts have lifted by 9.98 per cent since COVID-19 arrived in March, data from the Australian Prudential Regulation Authority (APRA) reveals, swelling by nearly $100 billion to $1.098 trillion,

And it’s likely people would be earning less income from their savings,

More than 40 banks have slashed interest rates on their savings accounts since the RBA lowered the cash rate to 0.10 per cent, a RateCity analysis has found.

“It’s abundantly clear from these non-competitive rates, the banks just don’t need or want any more deposits,” Sally Tindall said, research director at RateCity. “They’re officially paying peanuts.”

The RBA cash rate is a guardpost banks use to set interest rates for mortgages and savings accounts. Its lowering to 0.10 per cent in November -- an extraordinary new low not seen in 30 years of record keeping -- has helped make mortgages more affordable and spurred home loan lending, but it has also given banks reason to slash the earning power of people’s savings.

“It’s frustrating to see savings rates tumble despite no move to variable home loan rates,” Ms Tindall said.

“People looking for a competitive rate on their savings account or their home loan have to get up and do something about it. Do nothing and you’ll be duped.”

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Learn more about savings accounts

What are the two types of NAB locked savings accounts?

With a locked savings account in NAB, you can earn bonus interest and learn financial discipline. NAB offers two types of locked savings accounts, each with their own terms and conditions.

The NAB Reward Saver account pays a variable base interest rate of 0.05 per cent per annum and a bonus interest of 0.55 per cent. You’re eligible for the bonus if you make a minimum of one deposit on or before the second last banking day and have no withdrawals in the month.

Meanwhile, the NAB iSaver account provides 0.05 per cent as the standard base interest rate and a fixed bonus margin of 0.55 per cent during the first four months from the date of opening the account. You can park your cash in the account and enjoy unlimited monthly transfers between linked daily bank accounts without impacting the interest rate.

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 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 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.

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.

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 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.

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. 

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 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.

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.