Australians tipped to be saving more of their incomes in the next three years

Australians tipped to be saving more of their incomes in the next three years

Australians are hanging on tight to their money, with savings levels tipped to stay high in the next three years, new IBISWorld research found. 

While the budgets of many families and workers have been hit hard by the pandemic, others who have kept their jobs have managed to remain financially secure, and are taking action to protect their finances

Household savings as a proportion of gross disposable income jumped to 7.9 per cent in 2019-20, compared with 2.7 per cent in the year prior, according to new data from IBIS World.

“As with the post-GFC recovery, savings are likely to remain at elevated levels for at least the next three years. Consumers are likely to spend cautiously as they did after the GFC (global financial crisis),” the research firm found.

IBISWorld senior industry analyst, Matthew Reeves, attributed the surge in savings rate partly to the temporary relief in housing cost payments.

“The largest component of household expenditure is rent and other housing costs such as mortgages,” he said.

“Rent and mortgage relief provided by landlords and banks since April 2020 has constrained spending in this area, which accounts for 20 per cent of total household spending.”

Household net savings ballooned to a staggering $42 billion from $7.1 billion in the June quarter, data from the Australian Bureau of Statistics (ABS) found, as Australians spent $35.2 billion less due to temporary business shutdowns.

Government stimulus propped up family incomes: RBA

Reserve Bank of Australia’s deputy governor, Guy Debelle, noted that household incomes did not tumble along with gross domestic product and employment declines, which he described as “remarkable and highly unusual”.

“Normally in recessions, household income falls along with the decline in output and employment,” he said, speaking at an online conference run by Australian Industry Group on Tuesday.

“This time that hasn't happened because of the income support from the government through JobKeeper and JobSeeker.” 

Dr Debelle also attributed the rise in improved cash flows to superannuation withdrawals, lower interest rates and financial support from the banks. 

He argued that if the government had not provided financial stimulus, financial hardship would have been worse for many.

“The fact that household income rose in the quarter does not mean that the stimulus was overdone,” he said.

“That households saved a large amount of this income support means that their balance sheets are in a considerably better place than would normally be the case in a recession. They are better placed to support the recovery as it unfolds.

“The transfer from the strong balance sheet of the government to bolster the balance sheet of the household sector is an entirely appropriate and timely policy response.”

Money goals shelved during COVID-19

While some have been fortunate enough to bump up their savings in a recession, many other Australians have been making financial sacrifices, with major money goals being put on ice.

A third of Australians had no choice but to use their life savings to survive since the onset of the pandemic, a MyState Bank commissioned survey of more than 1,000 showed.

One in 10 of those who dipped into their savings say they have wiped out more than half of their nest egg.

Of those who were forced to spend their savings, nearly a quarter indicated that they originally planned to use those funds for a first home deposit. One fifth were saving for their golden years, while 25 per cent said the money was supposed to go towards a holiday.

“The economic implications of COVID-19 have caused many households across the country to redirect their savings to the basic necessities, shelving their big financial goals and decisions, at least, for the time being,” according to MyState Bank general Manager of customer experience, Heather McGovern.

Family savings are largely going towards buying groceries and paying for household bills, the survey found. 

Personal finances in trouble

Financial stress is rife. Half of Australians believe that spending another $200 on their monthly living expenses would be unaffordable.

And nearly 40 per cent of those polled said they did not have an emergency fund set up pre-COVID.

Many Australians have been left financially struggling, despite the range of government and bank-provided hardship support measures, Ms McGovern said.

“While lockdown measures have helped some Australians into a better financial position; for others, it has left gaping holes in their household income,” she said.

Nearly one in five indicated that their household income has dropped by more than a quarter as a result of the pandemic.

“What started out as a health crisis has been felt in the hip pockets of many Australians across the country,” she said.

“With financial support from the government winding back in September, many Australians are likely to feel the pinch even more. As a bank we recognise the need to help our customers stay financially healthy during this time.”

Yet more than 40 per cent of respondents reckon it will take another six to 12 months before finances will recover from the impact of the pandemic.

 

Big four banks - standard accounts

Bank Product Intro rate Ongoing rate Intro term
CBA NetBank Saver

0.90%

0.05%

5 mths
Westpac eSaver

0.85%

0.05%

5 mths
NAB iSaver

0.95%

0.05%

4 mths
ANZ Online Saver

0.80%

0.05%

3 mths

Source: RateCity. Note: Data accurate at time of publishing.

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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.

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 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.

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

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 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 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.

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 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)

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.

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

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 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.