While you’ll find a variety of budgeting strategies and saving rules online, one thing is for sure: all adults should have savings. Saving is a necessary financial strategy, especially if you’re working towards short-term goals such as an upcoming wedding or a deposit for a home loan. Savings also provide necessary buffers during emergencies like medical bills or car repairs.
It’s also just generally a good idea to have extra money. The future is uncertain, and savings will give you that peace of mind that you’ll be prepared for whatever happens.
One practical way to start saving is to open a savings account where your money will not only be safe but will also grow at a steady rate thanks to interest. But knowing you should be saving and knowing how to choose a savings account that suits your needs are two different things. Read on to find out everything you should know before opening an account.
How savings accounts work
Much like a cheque or transaction account, a savings account is a bank account where you can deposit and withdraw money. However, unlike a regular transaction account, a savings account allows you to earn interest at a higher rate. So, in contrast to having your money sit idly in the bank, savings accounts can help you grow your money.
And unlike term deposit accounts, which don't allow you to touch your money for a set amount of time, savings accounts keep your money liquid – meaning you can usually deposit and withdraw whenever you need to, possibly by using a linked debit card.
Types of savings accounts
There are several kinds of savings accounts, and they can differ in terms of interest rates, fees, and required age for users. Here are a few of the most common types:
- Online savings account. An online savings account is perfect for the tech-savvy saver who's constantly on-the-go. There are many different types of online savings accounts, from accounts issued by online-only banks to online accounts linked to transaction accounts set up with regular bricks-and-mortar institutions. The primary advantage of having an online savings account is getting to monitor your savings through a mobile app rather than having to find an ATM. Another advantage to having an online savings account is the potential for a higher interest rate and lower account fees since you don't have to pay for over-the-counter transactions and other bank overheads.
- Bonus saver accounts. Sometimes, the thought of having extra money in the future isn't enough of an incentive to resist splurging. Instant gratification is a very common struggle for new savers. Bonus saver accounts help steer you away from temptation by offering bonus interest to those who can meet certain conditions, such as a limited number of withdrawals and a minimum deposit amount each month. If you're highly competitive and find challenges fun rather than restrictive, a bonus saver account could be useful for you.
- Introductory interest rate account. Some banks may offer a higher introductory interest rate for simply opening an account. These higher rates last about three to six months, then revert to a lower interest rate afterwards.
- Joint savings accounts. A joint savings account is simply a bank account that is shared by two or more people. Couples, relatives and business partners are the most common users of joint accounts, as maintaining one requires a certain level of trust and commitment. A joint savings account can either be accessed by any account holder without the need for permission from the other parties, or be accessed only with the written permission of all parties. Joint savings accounts are great for couples or families who are working towards a shared goal, such as saving up for a wedding, a home loan deposit, or a big holiday.
- Children's savings account. A kids' or children's savings account is a savings account designed for children younger than 18. Children aged under 13 usually need parental or guardian consent to open an account. A children's savings account may come with a higher interest rate and lower account fees, to teach and encourage kids to save. There may be other bonuses or incentives too.
- Pensioner savings account. These are savings accounts, often with a higher than normal interest rate, that help Australians over the age of 55 to save up for and manage their retirement funds. There are a few key features that set pensioner savings accounts apart, namely lower or non-existent account fees and a tiered interest rate system. Generally, the more a pensioner can deposit, the better their chances of having a saving account with higher interest.
- Cash management account. A CMA is an account similar to a cheque or savings account. It allows account holders to manage their funds, make deposits, invest, and earn interest without the need for separate accounts for each purpose. It's a popular type of account for Self-Managed Super Funds (SMSFs) and small businesses.
Reasons for opening a savings account
Maintaining a savings account is a practical and relatively low-risk way to manage savings and grow your money over time. As mentioned, interest compounds, so you can earn more interest simply by depositing frequently and leaving the money in the account for longer.
Typically, people tend towards savings accounts when they have a short-term financial goal in mind, such as a big upcoming expense like a honeymoon or a car loan deposit. As well as these goals, there are three more reasons why savings accounts are worthwhile:
- Savings accounts keep your money safe. There is no point in keeping your money stashed under floorboards or mattresses, especially if the alternative is a safe but easily accessible bank that rewards you for your savings. Plus, when you open a bank account with an authorised deposit-taking institution (ADI), your savings are guaranteed by the government for up to $250,000 if the bank collapses.
- Savings accounts are convenient. If you open an account with a big bank, you won't be hard-pressed to find branches to deposit money into and ATMs to withdraw from. And if you've got an online savings account, even with a smaller bank or credit union, depositing and withdrawing are as easy as a few taps on your keyboard or phone.
- You can link an existing transaction account with a savings account. Want all your money kept at the same bank? Want to be able to transfer funds from one account to the other without additional fees and a long waiting time? Most banks allow their customers to set up multiple accounts and link them to one another, so you can have a transaction account and a savings account that talk to each other.
What to consider when comparing savings accounts
Comparison sites and calculators are great tools for identifying the best, most practical bank and account for you – but not unless you know what factors to look out for.
- Interest rate. First, make sure you're getting a good deal on your interest rate. Generally speaking, you will get a variable rate, meaning it will fluctuate over time. You might also be offered an introductory or honeymoon rate, which will typically be higher than the standard variable rate. Banks do this to entice customers into opening savings accounts. After the introductory rate period, your interest should move down to the lower standard variable rate. Be sure to check your contract to avoid the shock of your interest appearing lower than you expected.
- Bonus rate. A bonus interest rate is a bank's way of rewarding you for meeting certain conditions, such as zero withdrawals within a month. A bonus rate is also often awarded to savings account holders who meet a specified minimum deposit amount each month. Some banks may also hold special promo periods for new and existing customers.
- Fees. To make the most out of your savings, you'll want a bank that can offer a savings account with the lowest fees. Look out for banks that offer low to zero over-the-counter and electronic transaction fees, ATM fees and monthly account-keeping fees.
- Customer service. If not banking online, always consider whether a bank has enough branches and ATMs near your home and your workplace. After all, you don't want to go out of your way just to make a deposit or a withdrawal. It's also a good idea to look up online reviews and find out what people love and hate about a certain bank, and consider whether these are important to you. You'll want to join a bank with good customer service, as you're entrusting large sums of money with these institutions. Make sure the bank you choose is responsive, accommodating, and puts their customers first. Sometimes it can be worth sacrificing a higher interest rate in order to get excellent customer service.
- Minimum and maximum balance. Some banks impose a minimum maintaining balance on their account holders, meaning that they'll need to maintain a certain amount in their savings accounts or face a fee or reduced interest. It's also possible to have a maximum balance limit on your savings account, which keeps you from depositing beyond a certain amount. Check your bank's policies to make sure you can keep up with the balance restrictions.
- Withdrawal limits. Even with high interest savings accounts, it will take time for your money to grow. So, you'll want to keep your money in your account for as long as possible to make the most of your interest. That's why some banks impose limits on the number of times and the amount of money you can withdraw in a month. If you think you'll need to dip into your savings now and then, you might want to open an account at a bank that offers savings accounts with both high interest and lenient policies on withdrawals.
- ADI-registered. Lastly, always check to make sure that your bank or credit union is a registered Authorised Deposit-Taking Institution licensed by the Australian Regulation Prudential Authority (APRA). ADI-registered institutions are covered by a government guarantee that protects up to $250,000 of your savings in the unlikely event that the bank goes under.
The difference between savings accounts and term deposits
On the surface, savings accounts and term deposit accounts seem very much alike. However, there are a few key differences that set the two apart.
Much like a savings account, a term deposit allows you to deposit money into a bank account and earn interest while it's there. But unlike a savings account, where account holders are free to withdraw and deposit funds as they please, with a term deposit account you essentially lock your money away for a set time or term. You can only access your money once the term is over.
While this may sound restrictive, it does come with its own set of benefits. Locking your money up hinders you from making impulsive decisions. You also know exactly how much money you'll get, as well as how much interest you'll earn when your term is up. And you may qualify for a higher interest rate than you would earn on a standard savings account, plus the interest rate is fixed, not variable.
Qualifying for opening a savings account
Opening a savings account is relatively quick and easy. Banks usually require applicants to supply their tax file number (TFN), 100 points of identification, and their contact information and home address.
If you're opening a savings account at a bank where you already have an existing transaction account, you should supply your account details too. Finally, check if your bank has a minimum required starting deposit so you can have it on hand as well.
As for eligibility, it depends on the bank. Some banks require that their applicants are Australian citizens or have permanent residence in Australia. Other banks will allow foreigners to open accounts if they confirm that they are in the country or will be arriving within 12 months.
There is no minimum age limit, but, depending on the bank's policy, children younger than 13 will usually require an adult to open the account on their behalf. They will transition to a regular savings account when they turn 18.