Savings accounts allow you to put your money away on a regular basis and create a regular savings pattern. With most savings accounts you will be able to withdraw your money when you need it. Savings accounts are the ideal vehicle for your short term savings as they earn interest without the risk of losing the initial amount.
Although most savings accounts will pay interest on the balance of your savings, it will vary depending upon the type of savings account you take out, the incentives offered by the Bank or financial institution looking to attract your money, and the Rate of interest being offered by the Bank or financial institution and yes they are all subject to Income Tax. Although, savings accounts usually pay a higher rate of interest than a current account, most have conditions on deposits and withdrawals so it is best to check what is on offer and what will best suit your needs if wishing to avoid extra charges. Some accounts will offer higher interest returns on savings as an incentive to help you save but generally only if you maintain a certain balance or level of investment or in some cases based on you depositing a minimum sum to be eligiable. Money can be easily added or removed from the account by visiting the bank at any time; and in most cases there is no cost to do so. Banks may require a minimum to open or maintain the account.
ISAs offer everybody the opportunity to open a simplistic account to start investing. This type of account is often the easiest account for children to open. Because of its simplicity, it is the first account for many people and is used by all ages. After children open a savings account, the next account they often open is a checking account.
Online accounts may offer higher rates of interest because of lower overheads, but usually can only be accessed online. So it is important to decide what type of account is going to best suit your needs and consider the flexibilty being offered. If you have a mortgage then an offset account may be an answer.
Offset accounts are usually a current or savings account where the money in the account is 'offset' against the balance of a mortgage and instead of interest being received in the savings account, less interest is paid on the mortgage. This can be a good option for higher income earners who can still accumulate cash savings but not have to pay tax on any interest.
What to look for
> Compare interest rates - some accounts have a higher interest rate for an introductory period and then the rate drops, and others have a rate that goes up the more money you have in the account. For some accounts the interest rate drops to zero if you make a withdrawal. Shop around for the best interest rate, check out the promotional rate but don’t forget to consider the standard interest rate as well. If your savings are longer term savings then try and protect against the effects of inflation by choosing an interest rate that is more than the rate of inflation.
> Minimum deposit amount – some accounts require a certain amount to be paid in regularly, does this fit with your savings plan and with the surplus funds you have available?
> Additional bonuses – usually only payable in certain circumstances and you should make sure you understand the detail.
> Regular savings plan – does the account have the capacity to auto sweep money out of a current account or accept deposits from your employer?
> Length of deposit – are there any restrictions on how long you have to keep the money in the account to get a high interest rate?
> Interest payments – how is interest paid? Some add interest monthly, some only once a year. Explore our Power of compounding page for a reminder on the importance of the regular payment of interest.
> Fees – does the account attract any monthly account keeping fee?
> Access – can you access the account online? How do you deal with any problems you may have? Is there a branch you can visit if necessary?
> Tax – remember that interest paid on your savings is treated as income and you may have to pay tax on it, just as you pay tax on your wages. The amount of tax you pay will depend on your overall taxable income.
> Tax file number – remember once you do choose an account, to give your bank your tax file number otherwise they are obliged to withhold tax at 47.5 cents in the dollar for every dollar that they pay you in interest. If you don’t have to pay tax at the top rate then this money is better off in your bank account working harder for you rather than with the ATO.
What to consider
> Create a separate account from your normal current account. This is a great way to save money for future expenses. You can have one account and save for different things or you can have as many accounts as you like for different purposes but just remember to consider bank fees. Online savings accounts are the ideal vehicle for these short term savings because of their higher interest rates and no fee structure.
> If you have to withdraw money from your savings account for an emergency, try and consider it like a loan and set up a repayment schedule so that your savings are restored.
> Consider asking your employer to deduct a fixed amount from your income each pay period and have it deposited directly into your savings account.
> Consider diverting any extra cash straight into your savings accounts. Extra cash could come from bonuses, salary increases, tax refunds, overtime pay or income from a home business.
For comparisons on the types of savings accounts on offer see:
> Infochoice is an excellent comparison site covering a variety of savings accounts, term deposits and debit cards. Scroll about half way down the page to select the type of account you are interested in to search and compare a variety of different types of accounts.
> Savings Accounts Australia offers information about the different types of savings accounts available.
> Top Interest Savings Accounts - Choice
