High interest savings accounts have gained more interest (figuratively and in reality) in recent months as interest rates around the world rise in response to the recent bout of inflation being experienced throughout western economies. As central bankers raise rates to discourage borrowers, higher rates also induces savers to save more as their money earnings higher rates of return. This article takes a look at the various types of accounts available to investors and savers and how each can be used for maximum benefit. The most common Australian savings accounts are transaction accounts, savings accounts, high-interest savings accounts, term deposits and offset accounts.
No Interest Accounts
Most Australian banks will offer some version of their own transaction account. Westpac has its Choice account, Commonwealth Bank has the Smart Access account and ANZ has its Access Advantage account to name a few. Transaction accounts are typically used by individuals, couples, trusts and businesses to allow them to engage in frequent transactions in order for them to engage in their daily payments and banking activities. Most accounts will have access to the Mastercard or Visa payment networks and have the ability to make payments via a variety of methods including BPay, Osco and direct account transfers. Money that tends to flow through these accounts is quite fluid and as a result this makes it difficult for banks to rely on these funds when lending to borrowers, as such these types of accounts tend to pay little, if any, in the way of interest on money held on deposit.
Low Interest Accounts
An alternative to No Interest Accounts are Low Interest Accounts. These differ from No Interest Accounts in that while these types of accounts still provide the ability to make and receive payments, card payments are usually not possible via these accounts. You will often see these types of accounts being used in the management of a self managed superannuation fund or trust, where the primary activities of the entity provide for less frequent transacting and often higher balances then an everyday transaction account. The amount of interest that can potentially be earned depends on the bank and type of account being offered, but its not uncommon for the rate of interest to be in someway linked to the Reserve Bank of Australia’s cash rate. The most widely used Low Interest Account for self managed superannuation funds is the Macquarie Cash Management Account.
High-interest savings accounts offer higher interest rates than traditional saving accounts, transaction accounts and low interest accounts and they often come with no or low fees, but banks will often require the high-interest savings accounts to be opened and managed online. They rarely offer in-branch and ATM services and require funds to be deposited and transferred online. They also have little to no transacting capabilities other than to transfer funds to another account held by the depositor with the same bank. Accounts with higher balances can sometimes negotiate higher interest rates than those with lower balances. The At-Call features of High Interest Savings accounts make them popular for people who are looking to park a large sum of money in an account for a period of time but who’d also like to maintain the flexibility to access those funds at a future time as and when needed without penalty.
Deposit accounts tend to offer the most attractive interest rates for investors who want the safety of a government guaranteed deposit and a reasonable rate of return. Investors that use term deposits are agreeing to keep an agreed amount of money on deposit with the bank for an agreed amount of time . Investors using these accounts typically understand how long these funds can be invested for without the need to access the funds. As a result, banks will tend to be more willing to offer higher rates of return for these types of deposits given the higher certainty that they have that the money can be used for their lending programs. Depositors who do choose to access their term deposit monies before the maturity date will often be subject to penalties such as a steep reduction interest interest earned and in some cases, even early exit fees.
Offset accounts are transactional and savings accounts that are attached to the home loan of its owner. The interest earned by the offset account “offsets” interest paid on the owner’s home loan. Offset accounts can create tax savings as the interest earned in this account is not considered taxable income unlike the income earned in traditional saving accounts.
Since the Global Financial Crisis of 2007 to 2009, the recovery was marked by more than a decade of extraordinary low interest rates on all forms of interest bearing accounts. But now that appears to be changing and we are now witnessing frequent rate rises. If you are considering the best places to store you hard earned cash, You can learn more about achieving your savings goals by using the MoneySmart savings calculator or by requesting a Complimentary Financial Assessment with a member of the United Global Capital advice team.
How to Increase Savings…
- Record or track your expense (know what you are spending on)
- Implementing a proper cashflow management system
- 10% – Fun & Leisure
- Spent each pay cycle
- 10% – Savings for Later Spending
- Clothes, TV’s Car, Holidays, School, etc
- 60% – Non-Negotiable Costs
- Phone, Mortgage, Rent, Food, etc.
- 10% – Cash Reserve
- Cover 3 to 6 months living costs
- 10% – Investing
- (Save 20% as soon as Cash Reserve is replenished
- 10% – Fun & Leisure
- Restructuring cash flows (refinancing debt, restructure payments)
- Finding new sources of income (second job, side hustle, pay rise, change jobs, overtime)
GENERAL ADVICE AND PAST PERFORMANCE WARNING
This article has been prepared by United Global Capital Pty Ltd (ACN: 154 158 273, ABN: 25 154 158 273, AFSL: 496179).
This article contains general information only and is not intended to provide any person with financial advice. It does not take into account any person’s (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making any investment or financial decisions. United Global Capital Pty Ltd does not make any representation as to the accuracy, completeness, relevance or suitability of the information, conclusions, recommendations or opinions contained in this article (including, but not limited to any forecasts made). No liability is accepted by United Global Capital Pty Ltd or its directors, officers, employees, agents or advisors for any such information, conclusions, recommendations or opinions to the fullest extent possible under applicable laws.
Anyone considering making any investment decisions based on the information contained in this presentation should note that past performance, target returns or estimates of returns is not a reliable indicator of future performance and actual results can vary significantly.