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What is a savings account?
A savings account is a way to securely put money aside for the future. The money you save will earn interest as it can be used by the bank to lend out to others. Interest, in effect, is a small compensation the bank pays you for the use of your money. But don’t worry, savings accounts are very secure, so your money will always be available when you need it! The interest alone will increase the balance in your account. As the balance in your savings account grows, so will the amount of interest you earn. So starting the savings process is a rewarding way to watch your money grow over time.
Most savings accounts will pay interest monthly, but this 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 interest you earn. Your RWT rate depends on your taxable income. For more information, you can visit this government website.
What are the different types of savings accounts?
There are four main types of savings accounts:
Traditional Savings Accounts
A traditional savings account is your simplest approach to saving. These accounts typically give you full access to your funds for withdrawal, but may offer a lower interest rate. How the account works will depend on the bank’s terms. Some accounts may require anty initial minimum deposit, or limit the number of withdrawals per month. It is important to read the Terms and Conditions of the account, and to understand how the savings account works. A traditional savings account is ideal if you are unsure of what you can put aside.
Internet Savings Account/Call Accounts
These accounts are managed via the internet only, as opposed to having a physical branch. This can mean they offer higher interest rates than traditional savings accounts. Call Accounts do not usually have an initial deposit requirement, nor limit the amount of withdrawals or deposits per month. All you need is an internet connection to have instant access to your funds. However, generally these accounts cannot be connected to an EFTPOS card, or used for ATM withdrawals. Again, the terms will vary from bank to bank so it is important to read the fine print!
Incentivised Savings Accounts
These accounts reward you for increasing your balance each month, and penalise you for withdrawals. Incentivised savings accounts are perfect if you are working towards a savings goal and can guarantee monthly additions to your 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 zero to low fees, and offer attractive interest rates to encourage saving behaviour. Once your child turns 18, the bank can help the transition to other savings accounts to suit their needs.
An alternative to Savings Accounts - Term Deposits
If you do not need instant access to your savings, you may wish to consider a term deposit. It is a fixed income investment account where your funds are inaccessible for a specified period of time - ‘the term’. Terms generally range from 1 month, to 5 years. The amount you place on term deposit is fixed, meaning you cannot add to it over the term. The interest rate is also fixed, which is paid at the end of the term when your funds become available.
Interest rates on term deposits will tend to be higher than savings accounts, but they offer reduced flexibility. There will be a termination fee if you break the term deposit to withdraw your funds, so this kind of savings vehicle is perfect if you do not need to access the funds in the immediate future.
Not every savings account is the same, so it is important to compare savings accounts of the same type from different providers. The differences can be in fees, interest rates, how they calculate the interest, and minimum initial deposits. Reading the fine print, understanding the T&C’s, and comparing your options is crucial for finding the best savings account for your needs.
Access to funds is 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 if you need the option of being able to access your funds.
Working towards a savings goal? An account that requires you to make additional deposits each month may be the best way to meet your savings goals! By doing this your balance will increase each month, earning you more interest. While these accounts may incur a penalty for withdrawals, it is important to weigh up what is more important to you: reaching your goal, or easy access to the funds.
Savings Account Summary
Research and compare providers and read the fine print. Be sure to understand the terms and conditions of your savings account, and how it works practically.
There is a trade-off between higher interest rates, and easy access to funds. Consider what better suits your savings needs.
Mix and match! It is possible to open more than one savings account, each with different goals and functions.