Resuscitate your nest egg with these simple tips

Resuscitate your nest egg with these simple tips

Savings accounts and term deposits in Australia have taken a bit of a kicking recently, thanks to the Reserve Bank of Australia (RBA) cutting the cash rate to an historic low of 1.00 per cent.

It’s not good news for those who rely on interest earned from savings, especially those in retirement. These Aussies will certainly be feeling the pinch as financial institutions slash savings account and term deposit rates to record-lows.

The major issue is that there’s currently no pressure on the banks to get your savings on their books. A low RBA cash rate means all competition is in home loans at the moment. Institutions don’t need to lure new customers with competitively high rates. Nor do they need to offer you cashback offers like they would with home loans.

Here are a few simple steps you can follow to help boost your nest egg.

Term deposits

Term deposits are a low-risk way for Aussies to watch savings grow – particularly if they’re prone to dipping into them. This is thanks to the ability to lock in rates for a set period of time and penalties around withdrawing your money early.

But when rates are shrinking and shrinking, it’s time to take action. 

  1. Call your lender and ask for a better rate

RateCity.com.au research found that from June to September 2019, the average 3-year term deposit rate paid at maturity (on a balance of $20k) fell from 2.26 per cent to 1.66 per cent. Over a three-year term, this is a loss of $360 in interest. 

Term deposit rate cut example:

Deposit amount

Savings duration

Interest rate

Final balance at end of term

Interest earned

$20,000

36 months

2.26%

$21,356

$1,355

$20,000

36 months

1.66%

$20,996

$995

With two more RBA cash rate cuts expected, there’s never been a better time to be proactive.

Most providers will negotiate on the advertised rates for their term deposits, particularly if you have a decent deposit. While competition has dwindled in term deposits, banks still want you in their books, so it’s worth picking up your phone and asking for a more competitive rate. Chances are you’ll get one! 

  1. Compare your options 

The easiest way to get a better rate is to give yourself a better rate. Use comparison tools to find a range of term deposits with competitive rates, as well as look over potential fees and costs.

Keep in mind that exiting a term deposit before the deposit term is up can result in exit penalties and fees. This should ideally be reserved for when your term deposit period has come to an end.

The highest interest rate offered by a term deposit on RateCity.com.au’s database is currently 2.00 per cent.

High rate 3-year term deposits:

Company

3-year interest rates (%)

Interest earned
($20k balance)

QBANK

2.00

$1,200

Australian Unity

2.00

$1,200

Community First Credit Union

1.95

$1,170

Australian Military Bank

1.95

$1,170

The Mutual

1.90

$1,140

Source: RateCity.com.au.

Note: Data accurate as at 16/09/19. Interest accrued annually.

Savings accounts

Gone are the days of savings account interest rates up to 7 per cent, as financial institutions slash their savings account rates left, right and centre.

In fact, RateCity.com.au research has found that from June to September, the highest conditional savings account rate offered by a bank fell 50 basis points to 2.50 per cent.  

If you rely on savings accounts to boost your nest egg, you’ll need to do more than compare other institutions. A major factor savers should keep in mind is inflation.

  1. Fight against inflation

A general rule of thumb is to keep your savings account interest rate above the rate of inflation. With inflation currently at 1.6 per cent and many savings accounts dropping under 2 per cent, the fight has never been more difficult.

That’s why it pays to shop around. Unlike term deposits, savings accounts aren’t tied down to a set term with penalties if you leave. Comparison tools are a great way to find institutions offering more competitive rates. If you’re unhappy with your current savings account rate, or it’s below the inflation rate, you might consider switching.

  1. Meet the conditions

You might be unaware that your savings account has a set of conditions that you need to meet to receive the maximum interest rate. Or perhaps your bank has recently changed these conditions and you’ve been following outdated instructions.

It’s crucial that you stay on top of these, as it could mean the difference between a rate of 0.50 per cent, and one of 2.50 per cent on your nest egg.  Check your savings account provider’s website at least once a year to ensure you’re still meeting the conditions of your account.

Conditional savers with high interest rates:

Company

Account name

Base rate (%)

Maximum rate (%)

Conditions

Bank of Queensland

Fast Track Savings Account

0.35

2.50

Deposit $1k monthly to linked account.

Up

Saver

0.50

2.50

Make 5+ card purchases per month.

MyState Bank

Saver Account

0.80

2.50

Deposit of $20, 5 card purchases monthly on linked account.

86 400

Save Account

0.40

2.50

Deposit $1k monthly to linked account.

UBank

USaver with Ultra

1.35

2.41

Deposit $200 monthly to linked account.

Source: RateCity.com.au

Note: Data accurate as at 16/09/19.

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Learn more about 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 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 an ANZ locked savings account?

An ANZ locked savings account locks your money and prevents you from spending. You may use a standard savings account as the account where your salary is deposited. You can then withdraw funds when needed, but aren’t able to make purchases with it. However, this account may not grow much as the continual withdrawing of funds will limit the interest you can earn.

With a locked savings account in ANZ, you know your savings will grow because you can’t access the money. You can also qualify for a bonus when you deposit at least $10 per month and don’t make any withdrawals. To help you with this further you can set up an automatic transfer from your regular ANZ savings or transaction account so you don’t forget to make a monthly deposit.

Your ANZ locked savings account offers you a base interest rate of 0.1 per cent per annum plus an additional bonus interest of 0.49 per cent per year. The interest is calculated daily and credited to your account on the last working day of the month.

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.

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.

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 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 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.

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 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 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.

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.