Households on the brink of 'savings cliff', ME Bank warns

Households on the brink of 'savings cliff', ME Bank warns

Government payments have cushioned the financial blow wrought by the coronavirus, but survey findings indicate about one in five of households face losing their footing as stimulus payments recede.

Out of 1500 surveyed households, 315 had about $300 in savings -- notably less than the current JobSeeker fortnightly payment. This is among the headlining findings of ME Bank’s Household Financial Comfort report.
The survey, conducted biannually and now in its ninth year, found the government’s JobSeeker and JobKeeper payments had helped people withstand the financial turmoil brought on by the COVID-19 pandemic, and illuminated some of the risks at stake if the safety net was pulled away too much or too soon.

“Government stimulus has bought some time and helped boost the financial resilience of Australian households for now, but a household savings cliff remains as government support tapers,” Jeff Oughton said, a consulting economist at ME Bank.

“Unless the economy gains momentum, tapering government support too soon could have disastrous consequences on the financial comfort of households.”

The “savings cliff”

Of the 21 per cent of households with about $300 in savings, only seven per cent said they could maintain their current lifestyle for more than three months -- or until the JobSeeker payment begins to taper.

The support payments were enough to help people maintain their lifestyles even as the country veers into a recession, the survey found, pushing the nation’s financial comfort by three per cent -- to a score of 5.76 out of ten. This is just shy of the historical high of 5.78 recorded in December 2014.

But the comfort afforded by a fortnightly stimulus payment, received by about 20 per cent of households surveyed, could be eroded when they are minimised towards the end of the year, Mr Oughton said.

“(The households have) lost income, their jobs and entire livelihoods, their wafer-thin savings buffer is dwindling, and government support is the main action stopping them from falling over,” he said.

“Many eyes will be on what governments do in the final months of 2020 and into next year.”

The survey found about 34 per cent of households were ‘worse off’ due to the pandemic. Of them:

  1. 33 per cent cited changes to employment arrangements and job security
  2. 24 per cent cited changes to income
  3. 24 per cent cited the “impact of COVID-19”

The hardest hit

Among the hardest hit by the pandemic is the generation stretching from the mid 1990s to 2000s, also known as Generation Z.

They were the largest recipient of JobSeeker at 12 per cent, dipped into their savings the most at 27 per cent, and withdrew funds from their superannuation the most at 27 per cent. 

“Gen Z actively took up a variety of support measures to bolster their financial resilience,” Mr Oughton said. “This is likely due to many being employed on a casual or part-time basis across COVID-19 affected industries such as retail, hospitality and tourism.”

Stretch your savings further

The wrong bank account can erode your savings by charging too much in fees or by earning weak interest rates. Finding the savings account that suits your financial situation may help stretch your money further. Consider comparing the different savings accounts available. 

One way that could help your savings grow is by opening an online savings account. These accounts typically have low or no account keeping fees, a high variable interest rate, and can be linked to your existing accounts. The reason for these perks boils down to them being an online only account, so they wouldn’t come with a bank card, for instance. 

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Learn more about savings accounts

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.

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 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 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 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.

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 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 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.

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.

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 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.