What is a savings account?

A savings account is a bank account that allows you to earn interest on your deposited funds. These low-risk products are provided by authorised deposit-taking institutions (ADI), which means all deposits with them are covered by the Federal Government’s guarantee of up to $250,000. So, up to $250,000 of your money in a savings account with any ADI is covered by the Government in case the bank collapses.

APRA (the Australian Prudential Regulation Authority) has a comprehensive list of ADIs in Australia.

As well as earning you interest and keeping your money safe, savings accounts can help you build positive savings habits. In today’s marketplace, most banks have mobile apps that allow you to set up automatic transfers to your savings account and can do things like sending you reminders when you’ve spent too much or track and manage your expenses for you.

What is a transaction account? Is it different?

There are actually different kinds of ‘bank accounts’ you can have. The savings account is just one of them – another is a transaction account, which is usually linked to the savings account.

While savings accounts let you save money and accrue interest, transaction accounts allow you to spend and transfer money. When opening a transaction account, you’ll be sent a bank debit card, letting you ‘tap n pay’, withdraw money from ATMs, make online purchases, and so on.

Transaction accounts earn very little interest (if any at all) so it’s generally best to keep as much of your spare cash as possible in the savings account and only what you need to cover your daily expenses in your transaction account.

What are the interest rates on savings accounts?

Interest rates on savings accounts are at record lows these days, so you’ll be hard pressed to find an interest rate that’s permanently above 3% per annum.

There are two types of interest rates on savings accounts:

  • The base interest rate: the standard interest rate on the account that you qualify for no matter how many withdrawals, transactions or deposits you make
  • Conditional bonus rate: an extra interest rate you get for meeting certain conditions, such as not making any withdrawals or depositing a certain amount in your account each month.

Not every bank account has a bonus interest rate. For example, one bank might have a base interest rate of 1.5% and a bonus rate of 1%, while another might simply have a base interest rate of 2.5% and no bonus interest rate.

Data from the RBA shows that interest rates on savings accounts have been decreasing over time. Have a look at the infographic below, which shows the average interest rates offered by the major banks.

Read more about interest rates on savings accounts here

Although there are a number of fee-free savings accounts available, they aren’t always free. Depending on the provider you pick, you could end up paying:

  • Monthly account-keeping (service) fees: the fee charged for keeping the account open and active.
  • ATM withdrawal fees: when using an ATM, you can be charged a small fee either by your bank or other banks.
  • Monthly statement fees: online statements (on your spending) tend to be free, but paper statements mailed to you might come with a fee.
  • Electronic transaction fees: savings accounts aren’t meant for transferring money, and doing so can carry a small fee.
  • Branch deposit fees: depositing money through a teller in a branch instead of online.

These fees can vary. For example, the highest account-keeping fee at the time of writing (November 2018) is $6 a month. Consider looking for an account that doesn’t charge a monthly service fee.

A lot of these fees are quite minor (often no more than a few dollars at most), but can be irritating if you’re trying to save money with your savings account.

There are multiple different kinds of savings accounts to choose from:

  • Online savings accounts
  • Cash management accounts
  • Kids savings accounts
  • Pensioner savings accounts
  • Business savings accounts

Bonus and online savings accounts

These are your stock standard savings accounts – they allow you to deposit funds, link a transaction account and set up automatic transfers for savings. They offer higher interest rates single transaction accounts (which often have 0% interest), and may allow you to earn bonus interest by meeting specific conditions.

Kid’s/children’s bank accounts

Also referred to as youth or junior banking accounts, kid’s savings accounts are specifically designed for children under the age of 18. These bank accounts require consent from a parent or guardian to open, but from certain ages onwards (usually 13), the children can manage the account themselves.

These exist so kids can learn the benefits of practical savings habits themselves. These accounts can even come with higher interest rates than adult bank accounts to encourage saving. They might require certain bonus conditions to be met to qualify for these interest rates, and can also exclude monthly account-keeping fees.

As at November 2018, the highest total interest rate (base interest + bonus interest) on the market for kids savings accounts is 4.75% p.a. while the highest rate an adult could get is 3.10% p.a.

Savings accounts for pensioners

Savings accounts for pensioners and seniors are designed for people over the age of 55 or for those living on the aged pension. These accounts function in much the same way as regular savings accounts with a few key differences:

  • Most are one linked account, allowing seniors to spend from their savings account: this reduces their need to manage multiple.
  • Waived account-keeping fees: some charge no fees at all while others require a small monthly deposit to waive the fee

Cash management accounts

Sometimes classified as ‘investment accounts’, cash management accounts can be used to receive cash from investments (like dividends and proceeds of sales) and purchase new investments. Cash management accounts can be useful for people juggling multiple investments alongside their savings, putting them all in one convenient location.

Cash management accounts can have higher interest rates than a standard savings account, but this will depend on who you’re with.

Business savings accounts

Not for the everyday punter, a business savings account allows you to earn interest on your business’s funds and keep it safe. They can often come with slightly lower interest rates compared to personal accounts and can require a higher minimum balance in order to earn interest.

First things first – don’t just open the first savings account you see. There are well over a hundred different savings account products on the market, some of which are offered by the same provider with different fees, features and rates.

Compare a shortlist of various savings accounts based on:

  • The interest rate offered
  • The conditions required to get the highest available interest rate
  • Whether the interest rate is always high or whether it’s merely an introductory rate
  • If it requires a minimum account balance, or if it limits your interest on balances over a maximum amount
  • What the account-keeping and ATM fees are
  • Whether it comes with a linked transaction account (most do)
  • Whether you can manage it through a functional, easy-to-use app

Once you’ve found your ideal savings account, it’s time to open it. Applying for a bank account online is very simple nowadays; it can take as little as 10 minutes online if you have all of the required information handy, such as your TFN (tax file number) 100 points of ID, contact information, your address and your name if you can remember it.

They’ll then contact you asking you to verify your identity, and you may have to then transfer a small amount of money to the account to activate it. You’ll also have the option of opening a linked transaction account; you should receive a debit card in the mail a few business days after activation.

Don’t forget your direct debits!

If you’re opening a joint transaction and savings account, then you need to think about what happens to all your old direct debits – those automatic payments you make for things like gym memberships, health insurance, credit card bills etc.

Thanks to a 2012 rule change by ASIC, banks make this very easy now by generating a list of all your direct debits over a 12-13 month period, as well as any credits (payments you receive, like salary). Some banks will even automatically transfer these payments for you, but if they don’t, you’ll be faced with going through and manually changing your details on their websites or over the phone. This is arguably the worst part about changing banks, but worth it in the end.

Should you close your old bank account?

This is up to you – there are definitely benefits to having more than one bank account. But if you’re not using it for anything, why keep it open? You could be getting charged fees without even knowing it.

Unfortunately, most banks don’t yet allow you to do this online. Funnily enough, it can be much easier to open one than it is to close. You’ll have to either visit a branch or call a staff member to get them to close your account, so prepare to get a few sales pitches and offers to keep the account open. Stay strong!

Here’s a quick summary of the pros and cons of a savings account:

Pros

  • Interest is compounding, so your interest can snowball over time
  • There is a government guarantee of $250,000
  • Savings accounts are at-call, meaning you can withdraw your funds at any time
  • You can use these funds however you please, be it for spending or for building up savings over time
  • They’re easy to open (most of the time)

Cons

  • Interest rates are quite low at the moment compared to other investment options, and will likely stay this way until the RBA cash rate increases
  • Not meeting bonus interest conditions will see you miss out bigger interest earnings
  • They’re quite inflexible without a linked transaction account
  • There are fees you can be charged, like a monthly account-keeping fee (these fees can be quite low, however)
  • They’re difficult to close (most of the time)

There are some great benefits to having a savings account, and if used correctly you could argue that these benefits outweigh the negatives. Interest rates are quite low at the moment so it’s difficult to see much merit in using them as an investment tool – the returns just won’t be big enough. What you can use them for however is in the name – savings. And that’s what we’re all about here.

Every paycheck, set up an automatic transfer using your bank’s online banking to go from your transaction account to your savings account. This can be any amount, but try to make it at least 10%. Don’t touch this money unless there’s an emergency, and watch how quickly it piles up! For quicker growth, try setting up daily transfers of, say, $10.

Just make sure you’ve weighed up the pros and cons of using a savings account, and that the one you’ve picked suits you.