Choosing the right bank account to suit your needs can help you make the most of your money – it could even give your savings a boost.
What is a savings account?
It’s all in the name – a savings account is a bank account that’s designed specifically for saving, primarily by paying interest on the balance in the account, while still providing access to the money when needed. Some savings accounts pay an introductory higher interest rate for a limited amount of time, whereas other savings accounts pay bonus interest when certain conditions are met, such as growing the balance of the account by the end of the month.
Generally speaking, savings accounts have a variable interest rate, so the interest you earn will likely fluctuate over time.
What are the benefits of a savings account?
- You can start small and add to your savings over time – with a savings account there’s no minimum balance required to open an account. You can start building your savings with just a small deposit and add to your savings either by making a regular deposit as part of a savings plan or by adding to your balance when you’re able to.
- Benefit from compound interest – not only can you earn interest on the money you have saved in your account; over time you’ll also earn interest on the interest paid into your account, helping to give your savings a boost.
- Easy access to your savings – a savings account lets you access your money should you need to and still earn interest (although depending on the account you may not earn bonus interest, depending on the conditions of the account)
- Bank accounts are a ‘safe’ investment – deposits up to $250,000 are guaranteed by the Australian government.
What about any downsides?
- Interest rates can vary – savings account interest is generally a variable interest rate, so it will likely fluctuate over time. That means if interest rates go down, you won’t earn as much interest on your savings. The flipside of course is should interest rates go higher, you’ll earn more on your money.
- It can be tempting to dip into your savings – the downside of having easy access to your savings is it’s easy to give into temptation and dip into your account.
- You may need a linked account – many online savings accounts require a linked everyday transaction account to transfer money in and out of the savings account. If you need to open a new transaction account, there may be fees attached, such as a monthly account service fee.
What types of savings accounts are there?
Although savings accounts all essentially pay interest on the balance in the account, there are variations to the types of accounts available. These include:
- Bonus interest accounts – this type of savings account pays bonus interest if you meet certain conditions, such as growing the account balance by the end of the month. These accounts will also often pay a base interest rate as well – this is the interest you’ll earn on the balance of the account even when you don’t meet the bonus interest conditions. If you’ve got a medium- or long-term goal, a bonus interest account could help give your savings an extra boost.
- Introductory interest accounts – these accounts offer bonus introductory rates, often for a period of 3-6 months of opening the new account. This could be ideal if you have a short-term savings goal in mind.
- Kids savings accounts – the main difference with a kids savings account is the account can be opened by a parent or guardian on the child’s behalf. Kids savings accounts will also offer bonus interest; however the conditions required to earn the bonus interest are often a lot simpler.
- Joint savings accounts – although not a separate type of bank account, many savings accounts can also be opened with two account holders. A joint account could be ideal if you and your partner are saving towards a goal together.
Choosing a savings account to suit your needs
The type of savings account that’s right for you will depend on your needs. If you have a lump sum that you’re not sure what to do with in the interim (such as a bonus or tax return), an account that pays a higher introductory rate of interest might be worthwhile, as you can withdraw your money at any time without losing out on interest.
If you have a savings goal in mind however and want to set up a savings plan to reach it over time, a bonus interest savings account may be a better option, as you’ll be rewarded for good savings behaviour by earning bonus interest when you grow your account balance.
How to open a savings account
You can open most savings accounts online and you can fund your account to start earning interest on your savings as soon as you have had your identity and Australian residency confirmed, which in most cases can be done instantly online. In some cases, however, you may need to go into a branch to have your identity and residency verified.
If you’re an existing customer, you will most likely be able to open your account online without needing to have your identity reverified.
What’s the difference between a savings account and a term deposit?
Although term deposits have many similarities with savings accounts, there are important differences. With a term deposit you agree to lock away a certain amount of money (the ‘deposit’) for a set amount of time (the ‘term’). In return for not being able to access your money you will get a guaranteed rate of interest for the length of the term you’ve selected. This means you’ll know exactly what the return on your deposit will be.
If you think you could be tempted to dip into your savings, one advantage of a term deposit as opposed to a savings account is that your money is locked away – handy if you could do with some impulse control, as you won’t be able to access your money in your term deposit.
On the flipside, it’s more difficult to access your money in a term deposit should you need to – in many cases you’ll need to give 31 days’ notice and will also miss out on interest. It’s important before you open a term deposit that you’re sure you won’t need to access the money while it’s locked away.
Term deposits also require a minimum deposit – usually between $1,000-$5,000 and you won’t be able to add money to your deposit once you’ve opened it. If you’re just starting out on your savings journey it may be hard to lock away a lump sum straight away.
Setting up a savings plan
If you’ve got a savings goal in mind, setting up a savings plan could help you reach it sooner. Put these following steps into place and you could be hitting your savings goals sooner than you think:
- Decide your goal – whether it’s a deposit on your first home, saving for your child’s education or perhaps some money set aside in an emergency fund – whatever it is, write your goals down. Once you’ve got them on paper you can prioritise them and sort them into longer-term and shorter-term goals
- Work out how much you’ll need to save and when you want to save it by – knowing what you want is one thing, knowing how much you need is another. Do your research and put some figures next to what you’ll need to have in your savings to reach your goal.
- Work out what you’ll need to save on a regular basis – let’s say it’s the beginning of the year and you want to get a head start on Christmas. You’ve set a goal of saving $1,500 by December, which leaves you 48 weeks save. That means you’ll need to be saving $31.25 a week
- Check your budget – take a look at your regular expenses and see if you’ll be able to achieve your goal within the timeframe you’ve set. Whatever your goals are, it’s important they’re realistic and obtainable. If you haven’t set up a budget before, now could be a good time to get one started.
- Open your savings account and set up a regular deposit – look for an account that will reward you with bonus interest to help give your savings an extra boost. You could also make it easy on yourself by putting your savings on autopilot with a regular transfer into your savings account.
This information is general in nature and does not take your personal objectives, circumstances or needs into account. Read the product Terms and Conditions and consider whether the product is right for you.