The Best Savings Account For Your Tax Refund
Almost two thirds of Australian taxpayers are expecting a refund this tax year, and it’s not chicken feed. The average tax refund in Australia was between $2,500 and $2,800 in 2018, a welcome windfall for many.
The Australian tax year ends on 30 June, with completed returns expected into the ATO by 31 October at the latest. If you believe you’re due a refund, then you might want to file sooner than Halloween so you get all that lovely money all the sooner.
Then you have to decide what to do with it
Once your refund arrives, you have some decisions to make. Some Aussies will pay down credit card debt, make an overpayment on their mortgage or pay some bills. Others will book a Bali getaway or take their cash shopping.
However, an increasing number of people are choosing to deposit their tax return into an investment vehicle like a savings account or term deposit to grow their stash. You can calculate how fast your stash might grow by using the InfoChoice Savings Calculator or the InfoChoice Term Deposit Calculator.
Finding the right savings account
If you have long–term saving plans but you like to be able to dip into your stash once in a while, then a savings account is the best vehicle for you. Head to a trustworthy comparison site to have a look at what the banks are offering before settling on one (or maybe more).
More than one account is becoming more popular as savers adopt the “bucket” method of managing savings – one account for each savings goal.
When looking for an account, don’t just look at the savings accounts with the highest interest rates, though, because these rates might not be as simple as they first appear. You may be looking at an introductory rate, for example, or the attractive–looking percentage rate may be dependent on you depositing a minimum amount each month. Or not making any withdrawals.
If you don’t meet these conditions, you might revert to the more lacklustre base interest rate.
Low interest rates
Then there’s the small matter of the current interest rates on savings accounts. Australia’s interest rates are at an historic low of 1.5 per cent (at the time of writing), with the RBA making noises about reducing them to one per cent by the end of the year.
This is a far cry from a decade ago when we were seeing seven per cent interest rates in banks for savings account holders. However, the Australian inflation rate is also extremely low so any interest is good interest because it does make your money grow.
You have to remember, though, that savings account interest rates are linked to the RBA’s official cash interest rate, so when this goes down, so does your interest. The upside is that when the cash rate goes up, it’s your lucky day.
There will be a worthwhile interest savings account out there for you, though; you just have to use an online savings account comparison tool.
For example, the ING Savings Maximiser account, for example, has a 1.0 per cent base rate and a 1.8 per cent bonus rate. This rate goes up to 2.80 per cent on balances between $10,000 and $100,000.
With lots of savings accounts, you get better rates if you have a linked transaction account with the same institution so you can easily sweep money across; always look for this in the savings account comparison tool.
Compare savings accounts from Australian banks, credit unions and building societies here.
Then there’s term deposit accounts
Depending on how big your tax refund is, you might be interested in a term deposit rather than a savings account. Term deposits work differently to savings accounts because you make a one–time deposit and then you leave your money alone.
The period of time you leave your money alone is known as the term, or the tenure, and this can be anything from one month to 60 months (five years). Generally, the longer your term and the size of the fund, the better the rate and return.
Compare term deposit rates, fees and features from Australia’s major banks, credit unions and other financial institutions here.
Term deposits are cushioned from interest rate fluctuations
The other difference between term deposits and savings accounts is that the interest rate is fixed at the time of opening. If the cash rate falls, your money will be snug, growing at the same rate. Of course, if we do have a sudden uptick in rates, your money will be snug growing at the same rate. Not so good.
You can really plan your savings campaign
However, with term deposits you know exactly what you’ll be getting when the fund matures. If, for example, you invest $2,000 in the Rabobank term deposit for five years at three per cent, you’ll receive $2,625 at maturity. If you choose not to have your interest paid out to you during the term, you’ll get a 0.10 per cent bonus.
You don’t have the same flexibility as with savings accounts
Term deposits aren’t as flexible and accessible as a savings account, though. Once you’ve made the deposit, you must leave it alone if you want your full returns. If you make an early withdrawal, of any size, you may lose some or all of the interest that you’ve earned.
You also can’t add to your fund during the tenure, which may lead to you feeling frustrated if you have spare cash and your savings account isn’t performing at the same rate.
Most term deposits on offer have minimum opening balances of $5,000, which might be more than your tax refund, but there are plenty in the market with a $1,000 minimum.
Of course, if you have a large credit card debt or personal loan, then you might like to use your tax refund to pay that down to save on interest payments. This will free up funds in the future for whatever savings vehicle you choose.
Alternatively, you could choose a modest term deposit ($1,000 minimum deposit) and start up a savings account as well, for your spare cash throughout the month. Many smart investors use term deposits as part of their diversified investment portfolio because they have fixed interest rates while being a bit more speculative with other accounts.