What to look for when choosing your next bank account
With interest rates soaring, many Aussies are pondering whether savings accounts and term deposits now offer attractive returns. Like all money matters, the devil is in the detail.
When interest rates were at record lows, savings accounts delivered very little value. Now they're on the up, the returns are beginning to look much more attractive.
Don't park your cash in the first available one though. Here's what you should consider.
1. No two accounts are the same
Interest rates can vary significantly between financial institutions and even between different products from the same provider. So, shop around.
Scrutinise the terms and conditions too, which also vary enormously. These include minimum opening balances, minimum and maximum monthly deposit amounts, withdrawal restrictions, and requirements on having other products with the same provider (e.g. a transaction account, mortgage or credit card).
2. To bank or not to bank
Mention 'savings account' and most people instantly think 'bank' - particularly the big four. However, by not casting a wide net, you could be missing out on a great deal.
By all means look at the majors, but also explore regional and smaller banks, digital banks without a branch network, global and investment banks, as well as bank alternatives like fintechs and credit unions.
Online comparison sites are a good place to start if you're not familiar with what institutions are out there.
3. Introductory vs ongoing rates
The interest rate looks great and you think you're turbocharging your savings. But that great rate quickly disappears and you're left disappointed.
That is because many financial service providers offer a temporary introductory or 'special' rate as a sweetener to entice new customers. And they generally only last for several weeks or months.
Weigh up both the introductory AND ongoing rates, to ensure you're getting the best deal for the longer term.
4. Savings or offset account?
If you have a mortgage, an offset account against your loan can be a savvy financial move.
Your income and other earnings get deposited into the account, with the amount subtracted from the total amount owing on your loan. Depending on your loan size and how much you have in the offset, you could save hundreds - even thousands - of dollars in interest each month.
For most savings accounts and term deposits to generate those kinds of returns, you'd need to start with a huge sum of money.
The trade off though is that you aren't being paid interest, so your account only grows by depositing more than you withdraw. And not all lenders and loans offer an offset account.
5. Tax check
There's no escaping tax on your income, which includes interest earned from savings accounts. What is within your control, at least to a point, is how much tax you pay.
The amount of interest earned obviously depends on how much you deposit - meaning you can adjust how much you contribute within a financial year depending on your income and how close you come to the next income tax bracket.
Children generally pay higher rates of tax than adults, so look into this before deciding to open a savings account for your kids.
Another tax-saving tip is to use your super as an alternative for long-term savings. You'll benefit from a 15% rate, instead of the income tax rate. Plus, if you qualify for co-contributions, the government will boost your savings too.
6. Better off overall
My best single piece of advice is this: look at the big picture to ensure you will be better off overall.
Watching your savings grow with the help of bank interest seems great, but with inflation currently well above the interest rate on most savings accounts and term deposits, cash savings are actually declining in value. And that's before the taxman takes a cut.
Similarly, other investment types often deliver better returns than cash - especially longer term.
However, savings accounts are great for helping to grow your emergency fund, providing liquidity if you're debt-free, or saving for upcoming plans (like a first home deposit).
Carefully consider your current circumstances and your reasons for putting money away, then go for the option that best helps you meet those goals.
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