Savings Accounts Guide in New Zealand
It’s impossible to predict what life will bring, so it’s always a good idea to maintain a savings account to help prepare for the unexpected. New Zealanders who are on the hunt for the best option to use for a savings account have come to the right place.
Savings accounts can be used for multiple purposes. Whether it’s to save for a specific event or just to set aside money for an emergency fund, it’s important to know the best savings account options that are available.
This article will explain the ins and outs of the savings bank accounts available in New Zealand, to help Kiwis decide where to put their rainy-day funds. People who are looking for the best ways to save their money are already on the right track to financial success.
What is a Savings Account and How Does It Work?
A savings account provides a way to securely put money aside for the future. Because the bank can use those funds to lend to other customers, the money will earn interest as it sits. That interest is basically a small compensation that the bank pays for the use of its customers’ money. But even though the money is being put to use by the bank, as a general rule, savings accounts are very secure, so that money will always be available when it is needed. The interest alone will slowly increase the account’s balance, and as the funds grow, so will the amount of interest they earn. So starting the savings process is a rewarding way to watch money grow over time.
While most savings accounts accrue interest on a monthly basis, this policy may differ depending on the bank and account type. The interest rate will usually be quoted as an annual rate. Some accounts offer the opportunity to earn bonus interest if the balance in the account increases each month.
A resident withholding tax (RWT) is deducted from the earned interest. The RWT rate depends on the individual’s taxable income. For more information, visit this government website.
Savings Account vs Term Deposit (An Alternative Investment)
Those who will not need immediate access to their savings may wish to consider a term deposit, which is a fixed income investment account that will not be accessible for a set period of time - the “term.” Terms generally range from one month to five years. Term deposit amounts are also fixed, meaning that money cannot be added until the term is up. The interest rate is paid at the end of the term, when the funds become available.
Although term deposits generally come with higher interest rates than savings accounts, they do usually have reduced flexibility. And while this kind of savings vehicle is perfect for those who do not need to access their funds in the immediate future, there will be a termination fee incurred for anyone who needs to break their term deposit to withdraw funding.
Types of Savings Accounts
There are four main types of savings accounts to compare:
Traditional Savings Accounts
A traditional savings account is the simplest approach to saving. These accounts typically provide customers with full access to their funds, but may also offer a lower interest rate. How the account works will depend on the bank’s terms. Some accounts may require an initial minimum deposit, or limit the number of withdrawals per month. Check the account’s terms and conditions to better understand how that specific one works. A traditional savings account is ideal for those who are unsure about how much they can put aside.
Internet Savings Account/Call Accounts
These accounts are managed via the internet only, and are not run out of brick-and-mortar bank branches. Because of this, they may offer higher interest rates than traditional savings accounts. Call Accounts do not usually have initial deposit requirements, nor do they limit the number of withdrawals or deposits per month. All potential customers need to get instant access to their funds is an internet connection. These accounts typically cannot be connected to an EFTPOS card or used for ATM withdrawals. Again, the terms will vary from bank to bank, so read the fine print!
Incentivised Savings Accounts
These accounts reward customers for increasing their balance each month, and penalise them for withdrawals. Incentivised savings accounts are perfect for those who are working toward a savings goal and can guarantee monthly additions to their savings. Some accounts may offer bonus interest, as well as a higher interest rate than most other accounts, and there is generally an upper limit on the amount these accounts can hold.
Children’s Savings Accounts
Many banks will offer savings accounts specifically for children under the age of 18. These accounts usually have either zero or very low fees, and offer high interest rates to encourage saving behaviour. When the child named on the account turns 18, the bank can help them transition to other savings accounts to suit their needs.
Reasons to Open a Savings Account in NZ
A savings account can help grow funds without requiring any more work after the initial deposit. They are a great, low-risk investment option.
- Money is accessible (but not too accessible). Because savings accounts can come with rules regarding the number of withdrawals allowed each month, that money isn’t as easy to spend as funds in a checking account, but it’s not locked away like a term deposit.
- A small deposit can start a savings account. There is no need for large deposits to start this type of account – unlike term deposits.
- Money is kept safe. In comparison to hiding money under the mattress, a savings account actually keeps money safe by storing it away.
Reasons to Avoid Opening a Savings Account in NZ
Savings accounts are not for everyone, for a few reasons:
- Low interest rates. If a Kiwi is attempting to make a large profit off of a savings account, the low savings interest rates will be a deterrent.
- Withdrawal limits. A savings account cannot be used as a checking account. So these do come with monthly withdrawal limits, and sometimes associated fees.
- A minimum balance may be required. Some institutions require a minimum balance at all times in order to keep the account open.
Things to Know Before Choosing a Savings Account
There are many reasons to choose a savings account. Before deciding which is the right choice, consider these things first.
How many bank accounts should I have?
A good financial goal includes at least one checking account and possibly multiple savings accounts. Give each account a different designation.
For example, one savings account can be designated for long-term general savings, while another can be for short-term holiday savings. Deposit separate amounts into the different savings accounts to meet those goals.
Are high interest savings accounts worth it?
While savings accounts interest rates are low, they are still worth having for a multitude of reasons. For example, if a Kiwi is wanting to save for a house deposit and would need access to the funds sooner rather than later, a savings account versus a term deposit would be most beneficial.
In addition, it is worth opening a savings account so that the funds can accumulate interest over time, versus having access to the funds in a checking account, which are tempting to spend.
Final Considerations When Choosing a Savings Account
Not every savings account is the same, so it is important to compare different providers’ savings accounts. These can come with a variety of differences, such as fees, interest rates, the ways in which the companies calculate the interest, and the minimum initial deposits. Reading the fine print, understanding the T&Cs, and comparing each option is crucial when deciding which savings account best fits an individual’s needs.
Access to funds is also a very important consideration. Higher interest rates often mean less flexibility in terms of withdrawing funds. An account with a lower interest rate, but unlimited withdrawals, may be a better choice for those who need to be able to access their funds.
Working toward a savings goal? An account that requires the customer to make additional deposits each month may be the best way to meet that goal! Using this method, the balance will increase each month, earning more interest. While these accounts may incur a penalty for withdrawals, it is important to weigh up what is more important in the long run: reaching a goal, or having easy access to the funds.