Savings Accounts

Your cash savings often form the base for your longer term investments so it makes sense to ensure that your cash funds, whatever they are for, are in accounts that meet your needs.  Savings accounts are deposit based which means that you will get back the money you have put in plus any interest due.

Before we look at savings accounts in more detail let’s touch on inflation. Inflation happens when prices go up throughout the economy and the effect of inflation means that the money you save will buy less each year.  Inflation is something that you should keep in mind when you are deciding where to park your long term cash savings.

 Savings accounts

Savings accounts allow you to put your money away on a regular basis and create a regular savings pattern. With most savings accounts you will be able to withdraw your money when you need it.  Savings accounts are the ideal vehicle for your short term savings as they earn interest without the risk of losing the initial amount. 

There are a wide range of accounts available from banks, building societies and credit unions so let’s explore some of the more common ones in a little more detail. 

Type of Account

Features

Current account

  • Standard bank account, usually into which your salary gets paid and direct deposits come from

  • The most common type of account and generally the default account that is provided by your bank

  • Account fees are usually determined on usage or a set fee per month

  • Usually a low interest rate because of the nature of the account

Savings account

  • Usually pay a higher rate of interest than a current account

  • May have conditions on deposits and withdrawals

Online savings account

  • Usually higher rates of interest because of lower overheads

  • Usually only able to be accessed online

Offset account

  • Usually a current or savings account where the money in the account is 'offset' against the balance of a mortgage and instead of interest being received in the savings account, less interest is paid on the mortgage

  • Good option for higher income earners who can still accumulate cash savings but not have to pay tax on any interest

  What to look for

Before you decide on a savings account, make sure you have considered or checked some of these key features so you know that the account is going to suit your needs: 

  • Compare interest rates - some accounts have a higher interest rate for an introductory period and then the rate drops, and others have a rate that goes up the more money you have in the account.  For some accounts the interest rate drops to zero if you make a withdrawal. Shop around for the best interest rate, check out the promotional rate but don’t forget to consider the standard interest rate as well.  If your savings are longer term savings then try and protect against the effects of inflation by choosing an interest rate that is more than the rate of inflation.
  • Minimum deposit amount – some accounts require a certain amount to be paid in regularly, does this fit with your savings plan and with the surplus funds you have available?
  • Additional bonuses – usually only payable in certain circumstances and you should make sure you understand the detail.
  • Regular savings plan – does the account have the capacity to auto sweep money out of a current account or accept deposits from your employer?
  • Length of deposit – are there any restrictions on how long you have to keep the money in the account to get a high interest rate?
  • Interest payments – how is interest paid? Some add interest monthly, some only once a year. Explore our Power of compounding page for a reminder on the importance of the regular payment of interest.
  • Fees – does the account attract any monthly account keeping fee?
  • Access – can you access the account online? How do you deal with any problems you may have? Is there a branch you can visit if necessary?
  • Tax – remember that interest paid on your savings is treated as income and you may have to pay tax on it, just as you pay tax on your wages.  The amount of tax you pay will depend on your overall taxable income.
  • Tax file number – remember once you do choose an account, to give your bank your tax file number otherwise they are obliged to withhold tax at 47.5 cents in the dollar for every dollar that they pay you in interest.  If you don’t have to pay tax at the top rate then this money is better off in your bank account working harder for you rather than with the ATO.

 Useful resources

Here are a couple of savings account comparison websites to help you decide which savings account is right for you:

Infochoice is an excellent comparison site covering a variety of savings accounts, term deposits and debit cards.  Scroll about half way down the page to select the type of account you are interested in to search and compare a variety of different types of accounts.

Savings Accounts Australia offers information about the different types of savings accounts available.

 Saving hints & tips

  • Create a separate account from your normal current account.  This is a great way to save money for future expenses.  You can have one account and save for different things or you can have as many accounts as you like for different purposes but just remember to consider bank fees.  Online savings accounts are the ideal vehicle for these short term savings because of their higher interest rates and no fee structure.
  • If you have to withdraw money from your savings account for an emergency, try and consider it like a loan and set up a repayment schedule so that your savings are restored.
  • Consider asking your employer to deduct a fixed amount from your income each pay period and have it deposited directly into your savings account.
  • Consider diverting any extra cash straight into your savings accounts. Extra cash could come from bonuses, salary increases, tax refunds, overtime pay or income from a home business.

Remember...

  • Decide what you need from a savings account (easy access, high interest, flexible saving) to help you choose the right one for you.
  • Ensure you can manage your account online or know what to do if you need to sort out an issue face to face or over the phone.