But what exactly is the difference between them? While they’re both bank accounts where you can stash away your money, they’re not the same. For example, a transaction account likely accrues very little interest, if any - especially in this low-interest environment. That said, savings accounts tend to offer some interest but there might be restrictions as to how you use the account.
Either way, let’s discuss all there is to know about savings accounts, transaction accounts, interest rates, and whether you have any other options. Maybe you don’t understand the differences, or didn’t even realise they were different to begin with. Understanding your current situation and what other options are out there is important to ensure you’re getting the most bang for your buck.
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What is a transaction account?
A transaction account is a traditional bank account you can use for your day-to-day expenses. You may have your salary paid directly into your transaction account, and this may be the account you pay your bills and other expenses from. This account is usually linked to your debit or credit card, which can be used to pay for goods or withdraw money from an ATM.
What is a savings account?
A savings account is a type of bank account that allows you to accrue interest on your balance. Some savings accounts will require you to meet certain deposit requirements each month to qualify for bonus interest, which could see your account balance bolstered even further.
There are a range of different savings accounts available to people of all ages. There are certain savings accounts geared towards younger people - such as BOQ’s Future Saver savings account - and others geared towards older people.
Using BOQ’s youth savings account as an example, let’s walk through how a savings account could work. Account holders are required to meet certain criteria each month to qualify for the bonus 3.00% interest rate. For example, they must deposit at least $1,000 each month, and make five eligible transactions from the linked Everyday Account on balances up to $50,000.
If you missed the mark and the eligibility criteria wasn’t met for the month, you’d only earn 0.05% p.a. interest on your account balance. Think of that like five ten-thousandths of 1. On a $50,000 balance, that results in a difference of $1,475 over the year.
While generally the more competitive interest rates are bonus interest rates, you’re still earning something. With transaction accounts on their own, you’re lucky to earn any interest.
Compare the pair: Transaction accounts vs savings accounts
There are a few differences between transaction and savings accounts. Let’s discuss the main points of difference.
Earning interest
As we’ve mentioned, savings accounts allow you to earn interest while transaction accounts generally don’t. This is a key difference as if you’re looking to make a few extra bucks, a savings account can definitely come in handy.
The crux of it is: savings accounts are made for savings, while transaction accounts are made for spending. Savings accounts can help you save even more with higher interest rates, bonus interest rates, and their monthly conditions.
That said, Macquarie recently made a move not seen for some time - it introduced a 1.50% p.a. interest rate on its transaction account. Customers are free to spend how they please, and still earn interest on balances up to $250,000. This means on a $50,000 balance customers could earn up to $750 per year provided it’s left untouched - as it’s a transaction account, there’s probably a lot of money going in and out and the interest earned changes accordingly.
Making transactions
Another point we briefly touched on is paying for stuff. While you may be able to set up expenses through your savings account (my gym membership goes through mine for some reason), you’ll generally use your transaction account for this type of stuff. Any bills or expenses you want to purchase including your groceries, food and drinks, clothes or other online purchases and so on will be paid for using your transaction account.
Basically, any time you use your debit or credit card (or Apple Pay or Google Pay on your phone), you’re using your transaction account. Your savings account won’t come with its own payment method; you’ll usually use your linked transaction account.
To attain bonus interest rates on savings accounts, customers are typically limited to the number of withdrawals or transactions they can make through the savings account. Some accounts require zero transactions to earn the most interest.
Fees
Fees on savings and transaction accounts can be different as their features are usually different. For example, a transaction account may come with things like an EFTPOS facility, ATM access, internet banking, BPAY which can all incur fees. On the other hand, savings accounts may not boast these features but instead offer different ones. This is why the fees can be different - you’re paying for different features.
For some savings accounts, fees can be waived depending on your age/whether you meet certain criteria. For example, Westpac’s youth savings account Westpac Life incurs a $5 monthly fee unless you deposit at least $2,000 each month into the linked transaction account, you’re under 30, you’re a pensioner or healthcare card holder, or you’re new to Australia.
There are also options for fee-free transaction accounts. If this is what you’re after, it helps to shop around and compare a few options.
Should you use a savings account or a transaction account?
Chances are, if you have a savings account, you already have a transaction account, unless you’ve gotten through life without using a debit or credit card somehow (unlikely). You may also have a savings account that you transfer money to and from.
You may be with the same bank your parents signed you up with as a child. Or maybe you’re still with CommBank since you signed up for Dollarmites many moons ago. If this is you and you’re looking to make your money work for you, you might want to look into some savings accounts from other brands.
Bigger incumbent banks typically don’t offer the most snazzy interest rates due to their higher overheads. Challenger brands, however, might not have as many staff or branches and offer competitive rates to attract customers.
If you’re under 35 years old, you’re in luck - the most competitive interest rates are generally available to you. Call it ageist, whatever.
What other options are out there for savers?
While savings accounts can be great for earning interest, they’re not your only avenue for saving extra dollars.
Term deposits
Term deposits allow you to lock money away into a separate account for a set period of time with a fixed interest rate. This means you can’t withdraw the money, lest you pay a penalty. Interest is then usually paid monthly, annually, or at-maturity.
Term deposit rates have been steadily climbing recently. With the Reserve Bank cash rate set to keep rising for a while, term deposit rates are likely to follow suit. The highest interest rates are usually found on term deposits of 3-5 years.
Let’s illustrate how a term deposit works with an example. Let’s say you lock $10,000 away in a term deposit with a 3% p.a. interest rate for two years. Interest will be paid at the end of term. This means that in two years, you would receive $10,600 back - meaning you made $600. Term deposit interest typically doesn’t compound meaning you don’t earn interest on top of interest like with savings accounts.
Term deposits can be good if you don’t trust yourself to not dip into your savings fund. This is because the money is locked away, and if you access it before it matures, you won’t be paid any interest. This could incentivise you to keep your paws off it.
Alternatively, you could consider the locked figure a bet between you and your bank; you’re banking on interest rates on savings accounts not rising during that time. You’d hate to lock in a 3% p.a. rate for three years only to see savings accounts climb to more than 5% p.a. The opposite also applies.
Investing in shares, property, ETFs, and more
Another way to make your money work for you is through investing. You could look into investing in property, shares, ETFs, crypto or any other kind of financial investment. Depending on how much money you have to get started, your options may be somewhat limited. For example, you may need a large deposit to start investing in property, while micro-investing allows you to dip your toes in the market without investing tens of thousands of dollars.
These investments can also carry a lot of extra risk. Transaction and savings accounts, and term deposits, are covered by the government’s $250,000 ADI guarantee. Be sure to always to do your research, understand what you’re investing in, and if you’re not sure whether it’s the right investment choice for you, speak to a financial adviser.
Also read: Beginner’s guide to investing for millennials
Photo by Eloy Carrasco on Unsplash
William Jolly
Alex Brewster
