Did you know that with some savings accounts, you’re losing money as opposed to saving it? Admittedly, this is a partial truth as you don’t physically get money taken out of your savings accounts. However, each year the cost of inflation (an overall percentage-based increase in the cost of general goods and services within an economy) can reduce the value of the money in your savings account if it isn’t at least being matched by a similar or higher interest rate. Here’s a very simplistic example.
In January of 2019, it costs exactly $1200 to buy a particular type of fridge that you want. You can’t afford the fridge currently and decide that you want to buy the item next year, so you save $100 each month for 12 months and you stash it under your mattress. It’s now January of 2020 and you have $1200, mission accomplished yeah? Well….not quite. Based on the current rate of inflation which is estimated to be approaching approximately 1.9%, the fridge’s value is now $1200 x 1.019 = $1222.8 after factoring in inflation costs.
Now I understand that most people don’t stash money in their sock draws or under their mattresses, but some savings accounts in Australia are essentially that, as there’s virtually no interest on a fair amount of savings accounts. To maximise your savings rate and even beat inflation in some situations, I recommend using a high-interest savings account (HISA). Some HISA’s in Australia are provide returns over 2%, meaning that not only are you beating the rate of inflation, you’re also gaining a slight profit in return.
While the idea of stepping away from the Big 4 may be daunting to some, using a few of the smaller banks that have higher interest rates is a worthwhile investment, particularly if you have a substantial figure in your savings account. It can mean the difference from losing and gaining hundreds, if not thousands of dollars each year. A common excuse I get for people not using these banks is “What if they go bankrupt and I lose all my money?”. The answer to this is simple, the Financial Claims Scheme (FCS). This scheme was introduced by the Australian Government in 2008 and it protects bank deposits up until $250,000. Meaning that if you had $245,000 in a savings account with a smaller bank and for whatever reason, that bank went bust and closed its doors, that the Australian Government will fully reimburse you your money.
So now that you realise that your money is safe with smaller banks because of the FCS, it’s time to choose one that fits your needs. One last tip for choosing a HISA is to carefully read the fine print on the terms and conditions. I steer clear from ones that have introductory bonuses for x amount of months because these often have a sharp decline in interest after the introductory period (typically around 4 months). Instead, I look for ones that have an ongoing interest rate. For example, ones that have a standard variable rate that can be greatly enhanced by meeting a bonus requirement each month. These deals typically only require you to deposit a minimum amount each month and to make several card purchases with your everyday account, which is relatively easy if you use it as your primary bank.
That wraps it up, choosing the right savings account is something a lot of Aussies overlook but it is a worthwhile investment for anyone who takes saving money seriously. Do not feel indebted to your bank, treat it like buying a new car or getting a house. Look around, do your research and find the best investment for you. If your savings account loses its interest rate or drops significantly, look again and swap over to another one. As long as you can beat inflation and meet the basic terms and conditions of your new account, you’re coming out on top.