Learn what characterises a savings account and understand how they differ from transaction accounts and term deposits.
What is a savings account?
A savings account is a type of bank account that allows you to earn interest on the money you have in there. These days, most of these are managed entirely online. Savings accounts are a low-risk investment option because all deposits in Australia of up to $250,000 are guaranteed by the Australian government (when deposited with an ‘ADI’ – Authorised Deposit-taking Institution).
Features and fees of savings accounts
Online savings accounts have a number of distinct features. Because the account is not physical, you can access it through your ADI’s internet banking at any time provided you have access to the internet and a web-enabled device like a tablet, computer or smartphone. This is handy when making money transfers in and out of your account, checking your account balance and paying bills. A number of online banks also have mobile banking apps which can be accessed easily if you’re constantly ‘on-the-go’.
Another great feature of these accounts is that they often have a bonus interest rate where the underlying or standard rate of deposit interest is boosted for a limited period of time (an introductory period) or if specific conditions are met. A quick scan of the market shows that bonus rate introductory periods can be for as long as three to four months and the boost can be in excess of 1% p.a. (against underlying or standard rates which are generally between 1-2% p.a.). Some of the typical bonus rate conditions you might come across include:
- Withdrawal restrictions: A limit on the number or value of withdrawals that can be made from the account per month in order to earn the bonus interest.
- Deposit requirements: To earn the bonus interest each month, a minimum monthly deposit might be required.
- Minimum/Maximum balance: Only balances over or under a set amount might qualify for the bonus interest
ADIs must make their specific bonus rate conditions clear for all potential customers, so it’s important you thoroughly understand these before signing up to an account.
As with many other financial products, there are sometimes going to be fees involved with maintaining an online savings account. Some of the costs you may find with online banking can include monthly account keeping fees, branch withdrawal or cash deposit fees and electronic transaction fees such as BPAY.
What’s the difference between a savings account and a transaction account?
Put simply, a savings account is a type of bank account designed to help you save money. You earn interest on the money you deposit into it. In comparison, a transaction account is one designed for you to make purchases (transactions) with for everyday expenses.
Funds from a transaction account are typically accessed with a debit or credit card and do not typically incur a fee for ATM withdrawals or electronic transfers of funds. Funds from a savings account often cannot be accessed with a debit or credit card. Because online savings accounts are not designed to be used for everyday transactions, they typically carry higher withdrawal fees. At the same time, many transaction accounts don’t actually pay you any interest at all on your money in your account.
Not understanding the difference between a savings account and a transaction account can be costly, particularly if it leads to a situation where you’re storing all your savings in a transaction account that earns no interest, instead of potentially earning hundreds of dollars of annual interest payments in a savings account.
Savings vs Transaction Accounts
|Online Savings Accounts||Transaction Accounts|
What’s the difference between a savings account and a term deposit?
The main difference between an online savings account and a term deposit is that you can access funds in an online savings accounts more frequently, whereas with a TD, you have to wait until the end of the deposit term. However, some online savings accounts have restricted access imposed in order to meet bonus rate conditions.
Another point of difference is that online savings accounts have a variable rate, so the interest earned can go up and down at any time, while TDs have a fixed rate – guaranteeing the rate of interest that you will earn over the set period.
In terms of interest paid, a quick scan across the market of available products in these two categories shows many online savings accounts actually match and indeed surpass the rates on offer by three-month TDs when you take into account the bonus interest factor.
Savings accounts vs Term deposits
|Online Savings Accounts||Term Deposits|
It’s important to do your research and take into account personal circumstances before making a decision on a financial product. Online savings accounts are a high-interest option if you’re looking to save for a goal but want the flexibility of accessing your savings 24/7. Ensure that you read the terms and conditions of each financial product before you sign up.