Savings Smart Guide

4. Which account?

What you'll learn in this step: some accounts are better for saving than others.

As you can see, relatively small changes in interest rates can make quite a difference to how quickly you achieve your savings goals. That means you should think carefully about where to deposit your savings.

Let's say you've amassed $5000. Keep it in your everyday bank account and you're likely to earn virtually no interest – and any interest you do earn will probably be eaten up by bank fees anyway. In a savings account, however, you might earn 3 per cent interest – or $150 interest a year. But if you put the money in a cash management account with an interest rate of 5 per cent a year, you'll be looking at $250.

Here's a guide to the five key types of bank account.

Basic

A basic bank account is just what it says – basic. There are usually no fees if you stick to the bank's withdrawal guidelines, but the downside of this type of account is that it pays little or no interest, so it won't do much to accelerate your savings.

Transaction

If you need a chequebook, your day-to-day banking is best served by a transaction account. However, such accounts come at a price.

Monthly account-keeping fees range from $2 to $15, though these may be waived if you maintain a specified monthly balance (say, $1000).

In addition, you may be liable for transaction fees if you exceed a specified number of free transactions. These fees depend on the type of transaction. If they are levied at all, online banking fees tend to be the cheapest at around 25 cents. At the other end of the scale, using another bank's ATM can cost you as much as $2.50 a pop, and you may be up for $5 for the privilege of interacting with a human being by making an over-the-counter withdrawal at a branch.

Check how your bank charges the transaction fees. Are transactions counted in chronological order, or does the bank allow the dearest transactions to be counted as your free transactions?

Fees may be waived if you are a student, pensioner or have other business with the bank, such as a mortgage. Ask the bank if you qualify.

Bank fees

A recent survey uncovered more than 100 different fees imposed by banks and other financial institutions, so analysing your banking habits and working to avoid fees can leave you with a meaningful sum. Here are some suggestions:

• Use your own bank's ATMs and avoid the fee for using a competitor's.
• Use the internet rather than a branch for your banking, as online fees are lower.
• Make sure the type of account suits the way you bank – if you transact frequently choose an account with a number of transactions built in, rather than one with a fee for every transaction.
• Some account banking fees are waived if you have a mortgage with the bank – check whether you qualify.
• Limit the number of withdrawals you make on your account. Don't draw small amounts frequently but a larger amount once a week.
• Withdraw cash when you're using Eftpos for shopping or petrol and save a separate transaction fee.
• Scheduling an automatic transfer via internet banking may be cheaper than arranging a direct debit.

Compare transaction accounts

Savings

These accounts have higher interest rates than regular transaction accounts and sometimes include features such as a “bonus” interest rate if you make no withdrawals in a month. The interest rate may be tiered, climbing as the balance of the account increases. Again, check how often interest is calculated and paid. And make sure you maintain the specified minimum balance or you might be hit with fees.

Compare savings accounts

Online savings

These accounts eschew the bells and whistles in favour of a higher interest rate. They suit people who are comfortable with only having access to their money online. You can usually transfer money to and from other accounts without the usually account-keeping or withdrawal fees – though be careful to read the small print on fees. At the time of writing, you could earn as much as 6.6 per cent on one of these accounts, versus a maximum 4.75 per cent in a standard savings account.

Compare online saving accounts

Read more about:

Net gains, Michelle Innis, July 12, 2006 – The Sydney Morning Herald: How the benefits of internet accounts stack up.

Term deposit

With term deposits, you deposit your money for a specified period, which can range from one month to five years. The longer the term, the higher the rate of interest. Again, check how often the interest is calculated and paid.

Compare term deposit accounts

Cash management account

Cash management accounts tend to come with all the bells and whistles of a transaction account but with the attraction of a higher interest rate, often calculated daily and paid monthly.

But – and it's a big but – you usually need a minimum of $1000, $2000 or even $5000 to open an account. Most CMAs come with tiered interest rates, and you might need a hefty balance to actually qualify for the top rates you'll see advertised. Lower down the scale you'll need to compare the rates with other accounts.

Compare cash management accounts

Cash management trust

A cash management trust is a pooled investment. A manager pools your funds with the funds of other investors and places the money in a variety of short-term money market instruments, such as bank bills. You'll need a prospectus and an application form if you want to put your money in a cash management trust.

While many have chequebook facilities, the minimum withdrawal could be $500, with penalties for smaller amounts. There's usually a minimum amount needed to open an account and they tend to offer a flat rate of interest.

Compare cash management accounts

Read more about:

The devil is in the detail, Michelle Innis, April 19, 2006 – The Sydney Morning Herald: Cash, debentures, online accounts and term deposits ... It pays to shop around when it comes to investments.

Is there an alternative to banks?

We've been talking about bank accounts, but of course there are other financial institutions that provide avenues for saving. You may be able to accelerate your savings with a credit union or building society, which tend to be cheaper than banks.

“Non-bank financial institutions” (or NBFIs) such as the one-time mortgage broker Aussie Home Loans now offer a broader range of financial products, too.

Read more about:

Small lenders find some benefit in retaining the interest, Marc Moncrief, May 9, 2006 - The Age: Small lenders are waiting to pass on last week's interest rate rise to their customers in a move that will increase competitive pressure on the big banks.