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What is a savings account?

A savings account is an account held at a bank or other deposit-taking financial institution – such as a credit union or building society – where you earn interest on the money you deposit. Savings accounts are not normally linked to a credit or debit card, so the money typically stays in the account for longer and accumulates quicker. Unlike term deposit accounts though, savings accounts are ‘at call’, which provides the money when you need it, but the interest rate is variable, meaning it can change.

Some savings accounts have conditions that need to be met to achieve a higher interest rate. This may include minimum deposits, minimum account balance, or limited withdrawals, among others. Typically in these situations, if you do not meet these conditions, your account will revert back to earning a smaller interest rate.

What are the advantages of a savings account?

Low risk

When it comes to mitigating risk when investing, savings accounts tend to be as good as they come. Your investment can only gain value unlike shares or property, and you can also usually withdraw and deposit money freely.

Money back guarantee

All banks with an ADI – banking license – in Australia are protected by a government guarantee. Even in the very unlikely event the institution goes under, your deposit balance is protected up to $250,000. If you have more than this amount, it could be worthwhile spreading it across different banks.

Easy to open and close

Savings accounts, particularly online, are usually very simple to open. The bank or institution may only need a few basic personal details, like your tax file number. They can be set up within minutes, and with the New Payments Platform and Osko, funds can be transferred in seconds.

Accessible funds

Whilst special conditions may apply to some accounts, you can usually freely withdraw and add money to a savings account without affecting the interest rate. This is more convenient than a term deposit account, for example, where you deposit an agreed amount for a set period of time and cannot access or add to it until the time is up.

What are the disadvantages?

Conditional interest rate

Savings accounts usually have bonus conditions you must meet in order to earn a higher interest rate, like minimum monthly deposits or a minimum account balance. If these conditions are not met, your account may revert to a lower interest rate.

No debit/credit card attached

By definition, savings accounts are not associated with a credit or debit card, which can be inconvenient if you need to withdraw cash from an ATM. On the other hand, many savings accounts are linked to transaction accounts that do come with a debit card.

Variable rates

Nearly all savings account rates in Australia are variable, meaning they can ebb and flow with the markets. This means your interest rate can go up or down from month to month. This is unlike a term deposit where the rate is locked-in for that period.

What to look for when comparing savings accounts

When choosing a savings account, there are several factors you should consider.

Interest rates

If you are looking for your money to grow as much as possible, the most important consideration is of course the interest rate. Many providers offer introductory ‘honeymoon’ rates where you earn at a higher rate for the first few months after your deposit, so it’s worth looking into this as well, although the rate usually reverts to something lower. Savings account rates are typically made up of base and bonus (or conditional) interest rates.

Conditions

As discussed, many savings accounts have criteria that need to be met to earn a higher interest rate. Typically these conditions are designed to make sure there is a significant amount of money deposited, so you may need to make minimum monthly deposits or maintain a balance above a certain amount. When comparing interest between accounts, be sure to also check what conditions need to be met in order to earn these rates.

Fees

In most cases, banks won’t charge monthly maintenance fees for savings accounts. However, there are many different types of fees that may be associated with opening accounts, including annual account fees and transaction fees. You should consider these fees when choosing an account as they could eat into your overall returns.

Accessibility

Some savings accounts make it very easy to access your money, while others limit this. For some people, since the primary purpose of a savings account is to leave your money to grow rather than constantly dipping in to it, an account that limits withdrawals or makes you grow the account balance is ideal as they essentially act as a forced way to save. Others may appreciate the flexibility that comes with always being able to access their money, however.

Linked accounts

If you decide you would like the option to sometimes use money in your savings account for transactions, you will need a linked account. Some banks make this easy by allowing you to link a savings account to your current transaction account using online banking. Some banks, in order to earn the top interest rate, usually require a linked transaction account.

Multiple savings accounts

Many banks allow you to hold multiple savings accounts at no cost. If you have several savings goals (simultaneously saving for a house and a holiday, for example), this can be a great way to compartmentalise your progress and have your eyes on the prize.

Savings Glossary