Savings Accounts up to 3.50%

Savers have enjoyed a respite in January as the Reserve Bank of Australia typically does not meet to discuss monetary policy in the first month of the year. After 2020 brought with it three cash rate cuts, savings interest rates have plummeted to nearly zero across banks big and small.

Australia’s biggest bank, CBA, snuck in a second savings cut just before Christmas last year. Following the November cash rate cut, over 70 banks have now cut savings rates, with the average rate now below 0.50 per cent.

Savers have no doubt been experiencing the brunt of the current low interest rate environment. But despite low rates and frequent out-of-cycle rate cuts, Aussies savers managed to squirrel away almost $100 billion in extra savings since the start of Covid-19.

And in news for our littlest savers, a recent ASIC report has taken a hard look at school banking programs. Popular programs, such as Dollarmites from CBA, have not been able to demonstrate that they actually help children develop long-term savings habits, noted the report. RateCity added that its recent consumer survey found just over half of respondents used a school banking program, and that it made “little difference” to how confident people felt about managing their finances later in life.

It goes to show that no matter what life stage you or your family are in, doing your research around the right savings account for your needs is invaluable.

Updated by Alexandra Ritchie on January 8. 2021

Whether you’re planning for a holiday or saving for a house deposit, savings accounts are simple, low risk way to boost your nest egg. Learn how to choose the right account for your needs and what interest rate too look for.

A savings account is a type of bank account where you deposit your money so it can earn interest. Generally, interest is calculated daily and paid monthly. The rate of interest is influenced by the Reserve Bank of Australia’s cash rate.

The different types of savings accounts include: 

• Introductory savings accounts

Banks will offer bonus interest for the first few months of the loan. The interest rate will then revert to a lower standard rate after a number of months, typically 3-6 months.

• Conditional savings accounts

This is a savings account where to earn the highest interest rate, you must meet the bank’s conditions, such as:

• Depositing a certain amount of money into the account each month;
• Making minimal withdrawals (or no withdrawals) from your savings account each month;
• Keeping the balance of your savings account above a certain amount; or
• Using another of the lender’s products, such as a credit card.

If you don’t meet the conditions, you’ll be reverted to a much lower (sometimes 0 per cent) interest rate for that month. 

• Online savings accounts

These are savings accounts that are based entirely online and usually accessed just via an app or online banking. Online savings accounts avoid costly overheads by cutting out branches altogether. This makes for an account with a typically higher rate and less fees than a traditional bank’s savings account. If you’re the kind of person who relies on branches and face-to-face banking, this type of account may not suit. 

• Children's savings accounts

Children’s savings accounts can help teach your child basic financial literacy in a digital age. Kids can gain an understanding of the banking system and learn how to save money, especially when paired with educational savings apps. Compared to adult accounts, children’s savings accounts generally have higher interest rates, but can come with higher fees. 

• Retirement savings accounts

Retirement savings accounts are targeted towards Australians over the age of 55 and pensioners. Interest rates are typically higher when you deposit larger amounts. Before compulsory superannuation, retirement savings accounts were a popular way working Australians could save for their retirement. While they are becoming more rare, there are still several accounts on the market. Retirement savings accounts are also afforded the same regulations and tax benefits as superannuation. 

Savings accounts use compound interest to help you reach your savings goals. Compound interest on high interest savings accounts is calculated daily and paid monthly.

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.

Also, making additional deposits can seriously transform your savings thanks to compound interest. For example, if you deposit $1,000 into a savings account earning 2 per cent interest over five years, your deposit would grow to $1,105. If you also made monthly deposits of $200, your deposit would grow to $13,715 thanks to compound interest. 

Here are a few things to consider when shopping around for a savings account:

What other low risk savings options are there?

The major benefit of a savings account is the low risk. You’re not investing anything, and your money can just sit and earn interest. It’s safer than hiding it under your mattress.

The other low-risk option to park your savings in is a term deposit. They are similar to savings accounts, however after you’ve deposited your money you cannot reclaim the funds until the end of a fixed term.

Term deposits are a competitive option for those who are prone to dipping into their savings. Term deposits allow you to lock away your money at a fixed rate, and charge you high fees for withdrawing it early.

The easiest way to choose a competitive savings account rate is to: 

• Keep your rate above inflation

A general rule of thumb is to choose a savings account rate higher than inflation levels. You can visit the RBA’s website to see current levels. This is simply because if your savings don’t grow at or above the rate of inflation, or your money will devalue. 

For example, a savings account with $100 in it at a savings rate of 1 per cent may grow to $101 in a year. But if inflation was 2 per cent, you’d need to have $102 for your original deposit to be worth the same amount.  

• Use comparison tables

Comparison tables allow you to compare apples to apples. Depending on the savings account type, you can filter down and view a range of accounts maximum interest rates. You can also compare how much interest you may earn on your original deposit. This can help you to choose the right savings account for your savings goals.

Keep in mind that there is more to a savings account than interest rates. If the account has high fees it may end up costing you more than expected. Further, if the high interest rate on your account comes with conditions, try to be prepared to meet them or you will miss out. 

Savings account interest rates are determined by the provider and influenced by the Reserve Bank of Australia (RBA) cash rate. 

Every first Tuesday of the month (besides January), the RBA meets to decide whether the cash rate should be increased, decreased or hold. This impacts millions of Australians and can alter interest rates for deposit accounts as well as home loans. 

If the cash rate were to be cut, for example, savings account providers would be expected to cut interest rates too. Vice versa for increasing the cash rate. When the cash rate is cut it can mean bad news for those relying on or living off of savings, such as retirees. In turn, it is generally good news for mortgage holders as their repayments may be reduced. The RBA takes all of this into consideration when determining whether to change the cash rate. 

Just because savings accounts are considered low risk, doesn’t mean there aren’t common mistakes you can make.

• Falling for introductory rates

Some people are shocked when they sign up for a savings account and find themselves earning less interest than was advertised. As mentioned above, some savings accounts can offer higher introductory rates for a few months to attract new customers. These can then revert to much lower ongoing rates. If you’re not careful, this low rate may be buried in the fine print. Do your research before applying for any savings account. 

• Not meeting conditions

If you’re not meeting the requirements of your conditional savings account then you’re missing out on some serious savings. In some instances the base rate of the savings account may be zero or just above it. Making this mistake time after time could cost you years towards your savings goals.

• Big savings but little risk

Ironically, another way some people misuse savings accounts is to store too much money there. Savings accounts often deliver lower returns than other investments. Once your balance reaches a certain amount, it might be worth considering whether you should withdraw some of the money and invest it elsewhere. Just make sure you understand the higher level of risk associated with your new investment.

• High fees

Some savings accounts can charge higher than average fees. Childrens accounts, for example, are known for charging high interest but high fees to compensate. Use comparison tables and savings calculators before you apply for any savings account to make sure you aren’t taking steps backwards in your savings journey due to costly fees.   

Many lenders offer joint savings accounts, which give two or more people access to the one account. 

You can open a savings account online in just a few minutes, or you can do so in a branch. You’ll need to provide both parties identification and contact details, as well as your tax file numbers if you don’t want to be taxed at the maximum rate. Just fill in the application and submit it to the savings account provider of your choice. 

Joint accounts are most commonly used by people in a romantic relationship, although they can also be used by friends or relatives who want to pool their savings. It’s important not to open a joint savings account with somebody unless you trust them. Keep in mind they will be able to withdraw any money you deposit in the account.