Save on High-Interest Savings Accounts & Term Deposits
With interest rates at record lows, it's tough for savers. Here's how to maximise your return on savings accounts and term deposits.
How to find the highest interest rate for your savings
Record-low interest rates might be good news for home loan customers, but they’re bad news for savers. So you have to maximise the interest you’re getting.
With the RBA cash rate as low as it has ever been at 1.5% in 2016 and 2017, average base rates on savings accounts dropped below 2.0% p.a.
But shop around and you can get closer to 3.00% p.a. with a bit of help from online comparison sites. Here’s how:
- Go to a comparison site such as ratecity.com.au* or mozo.com.au* and find the ‘Savings Accounts’ or ‘Term Deposits’ section.
- Enter your details, such as your initial deposit and (if it’s a term deposit) how long you want to put your money in for.
- Compare the results and pick a winner! NB: Most comparison sites will begin by showing you their recommended partner offers. These are marked ‘promoted’ or ‘featured’ and have ‘View Now’ or ‘Go to site’ buttons to take you to the provider’s website. To see ALL available offers, look for a link that says ‘Include all offers’ or ‘Show offers without Go To Site links’.
High interest savings accounts: The Basics
Albert Einstein famously said “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
A high interest savings account is much like an everyday bank account, albeit with a high interest rate to help you earn interest on your savings. Whether you are saving for a holiday, looking to buy a car or simply trying to ‘stash some cash’ for the future – a high interest savings account is a simple, easy and effective way to make your money work harder.
Unlike a lot of other investments, you don’t have to be the Wolf of Wall Street or a cryptocurrency savant to understand how to use a high interest savings account to build wealth. You simply deposit your money and make regular contributions; interest is in turn calculated daily and paid to you monthly. This magic is known as ‘’compound interest’’.
As such, if you are looking for an effective and easy-to-use product to maximise your savings, build discipline and earn interest, a high interest savings account is right for you.
How does a high interest savings account work?
When you deposit money into your account the bank will start paying you a standard variable rate of interest each day, which is then added to your initial savings on a monthly basis. If you’re eligible for any introductory bonus interest rates or rewards these are added to your standard rate, with the total being called the ‘maximum variable rate’.
At first glance, the returns on these accounts may seem small – but if you give it time they will start to add up, especially when compound interest comes into play. Most high interest savings accounts utilise compound interest, which means the returns you receive each month are calculated based on your initial investment plus the interest earned from prior months.
Essentially your money makes you more money, and that money makes you more money, and so on.
Here you can see how the return on a $2,000 investment with a recurring monthly deposit of $10 over five years equates to over $504.98 in interest earned (at a rate of 4% per year).
|Years||Balance||Cumulative deposit||Interest accumulated|
If you compare this to a term deposit, an investment of $2,000 locked in for five years at 4% but with interest paid on maturity (not monthly), the returns are far less.
|Time period||Year 1||Year 2||Year 3||Year 4||Year 5|
|Fixed interest (4%)||$0.00||$0.00||$0.00||$0.00||$400|
As you can see from the comparison tables above, by using compound interest in your high interest savings account, you would make $104.98 in additional interest. That is 26% more interest for simply opting to use compound interest.
The top 5 benefits of having a high interest savings account
1. It can be separate to your everyday banking
Separating your savings from your everyday banking can help you resist the temptation to draw down on your savings at a moment’s notice. While you can still retrieve your funds, it will take a day or two for them to arrive in your everyday account – which is enough time to cool down from that new laptop you think you need.
A high interest account can be a standalone account with its own BSB and account number, giving you the flexibility to deposit whenever you like without penalty. You can choose to open a high interest account with your everyday bank, or you can open an account with a completely different high interest account provider.
“Out of sight, out of mind” – if you are serious about building up your savings account, make regular contributions (ideally weekly, via an automatic deposit) and simply forget about the account altogether.
2. Low risk, guaranteed reward
Unlike stocks, it’s almost impossible to incur a loss with a high interest savings account.
The Australian Government guarantees your investment (up to a maximum of $250,000) in the event that your bank collapses.
This guarantee applies only to so-called Authorised Deposit Institutions (ADIs), which covers banks, including branches and subsidiaries of foreign banks, and many credit unions and building societies. A full list of ADIs can be found here: https://www.guaranteescheme.gov.au/rules/pdf/schedule-1.pdf
For those who are fortunate enough to have over $250,000, it’s possible to open multiple high interest savings accounts across numerous banks to ensure all of your savings are protected by this guarantee. It’s limited to one account, per customer, up to $250,000 with each bank.
3. Quick returns on your investment
With this type of savings account your interest is calculated on a daily basis and then paid monthly. This means the more you can regularly contribute, the greater your return of interest – your goal should be to hold as much money in a high interest account as possible on a daily basis.
Remember that the interest rates are not static and can change due to market fluctuations, so your return will be negatively impacted by interest rate decreases, but also make gains from rate rises.
4. Ease of access
You can deposit and withdraw funds to your account at any time without penalty. This gives you the advantage of being able to access your money quickly (if your account is with your primary bank).
For those who wish to give themselves ‘money options’, a high interest account does just that. At a moment’s notice you can draw down on your savings and use it as you see fit. If you have no reason to do so, simply let your money earn more interest by not touching it.
5. Bonus rates
Many banks offer increased interest rates for depositing a certain amount each month or for linking your savings account to an everyday spending account. Take advantage of these bonuses to maximise your returns and don’t be afraid to change accounts regularly to take up these bonus interest rate offers.
You can also receive ‘introductory bonus rates’ when you open a new account, which increases your rate of interest for the first few months. Be sure to check what the ‘standard variable interest rate’ is once this offer period is over.
The key to picking the best high interest savings account is to find a high introductory rate AND a high ongoing rate. See our guide on “How to find the highest interest rate for your savings“
3 drawbacks of high interest savings accounts
While high interest accounts are favoured for their overwhelming simplicity and compound interest, there are a few drawbacks to consider.
- You are your own worst enemy
Since you can access your money at any time, it can be easy to fall into temptation and start spending prematurely. If this is the case then consider taking out a savings account that rewards you for not dipping into your funds, or if you want to lock yourself out entirely, opt for a term deposit instead so that you will incur a penalty of lost interest if you redraw the funds.
- The time it takes to transfer back to your primary bank
If you’re moving funds from your savings account to a different bank then you may have to wait for up to three business days for the transfer to complete. This will eventually get faster when the new payments platform from the big banks comes into play (think instant bank transfers).
Not so much a drawback but more a pitfall to be aware of: While the government guarantees your savings up to a maximum of $250,000 for accounts you have with different banks, it may not apply to smaller subsidiary brands. For example, Bankwest is owned by Commonwealth Bank, and as such Bankwest is considered the same brand when the guarantee is applied. You can find out which banks are considered eligible institutions under this scheme here.
Features to look for when comparing high interest savings accounts
High standard interest rate
Don’t get blinded by introductory or maximum variable rates offered by banks. These typically only apply to the first four months of your account, and are known as “honeymoon” rates. In the grand scheme of things these temporary boosts won’t add that much to your returns, so first focus on getting the highest standard rate available.
Convenient online access
You should always opt for an online or e-savings account. Not only do these offer the highest interest rates due to the decreased administration costs, but you have the added convenience of being able to access your funds anytime, anywhere via your smartphone.
Bonuses for not spending
If you’re a regular saver then keep an eye out for savings accounts that reward you for resisting the temptation to spend. These accounts offer extra interest for making limited withdrawals, maintaining a minimum balance or depositing a set amount each month.
On the other hand, if you’re planning to withdraw from your savings then consider an account without the bonuses for not spending, since the reduced interest rate you incur may be lower than the standard rate of an account without the penalties.
While most high interest savings accounts won’t have any fees applied, always be sure to check the fine print when comparing what’s on offer.
Term deposits: The Basics
A term deposit is ideal for those who wish to lock their money away for a set period of time.
Often, these types of accounts are used by people as a way to ‘safeguard’ themselves from withdrawing the money or spending it on everyday expenses.
With comparable interest to that of a high interest savings account, the true benefit of term deposits is forcing you to be disciplined and enabling you to ‘set and forget’ your investment in an account that will financially penalise you if you break your ‘term’ agreement with the bank.
Term deposits are ideal for those who do not trust themselves!
A term deposit is an account that you open for a finite period of time. The average term is between 3 months and 5 years, depending on how long you wish to lock your money away for. The longer you lock your money away for, the higher the interest rate.
Upon signing up, you receive a fixed interest rate that will then begin to accrue interest against the money you’ve invested. Once the term has ended, you can opt to reinvest the money automatically back into another term deposit – or simply withdraw it all.
Unlike a high interest savings account, if you withdraw your money from a term deposit earlier than your pre-agreed term, you will incur a financial penalty for doing so.
6 benefits of using a term deposit
1. Higher interest rates
Banks are able to offer increased interest rates on term deposits when compared to high interest savings accounts due to the reduction in operating costs associated with you withdrawing, transferring or depositing funds.
While term deposit interest rates are slowly becoming comparable to high interest savings accounts, there are still only a few term deposit providers that offer higher interest rates. These higher rates are only useful to you if the term deposit offers monthly interest payments, to enable compound interest to work its magic. Be sure to check the fine print; you want the interest you earn monthly to be used in future balance calculations.
It’s also important to note that term deposits that pay you monthly may have a lower rate than term deposits that pay interest in maturity.
Given the magic of compound interest, you might be better off taking a lower interest rate if it means you can receive monthly interest payments.
2. Fixed return
Term deposits aren’t impacted by market fluctuations like high interest savings accounts are. Therefore, you can rest easy knowing your return at the end of the term will be exactly what was promised on the day you took it out.
3. Better for financial planning
As your return is guaranteed, this allows you to map out long term financial goals more accurately since you know for sure how much you’ll have at the end of the term. This is why term deposits are utilised primarily by older Australians, looking for certainty and safety of their retirement funds.
4. Your money is locked away
You can’t access your investment until the term ends without incurring a hefty early withdrawal fee, which reduces the chance of you spending it all in a moment of weakness. As stated above, a term deposit is a marvellous tool for those who do not trust themselves.
5. Government protection
Like high interest savings accounts, term deposits are guaranteed by the Australian Government up to a maximum of $250,000. If you have over $250,000, be sure to split the money across multiple banks to ensure the entire sum is protected.
6. Ability to negotiate better rates when depositing large sums
An often-forgotten trick with term deposits is that you can negotiate a far higher interest rate with your bank when dealing with deposits over $50,000. Banks are desperately bidding to hold your funds; they can use this money to increase their earnings via lending it out to others.
If you have $50,000 or more, organise to meet with your local bank manager and request a more competitive interest rate. This can be as much as 0.5% to 1% higher, depending on the bank and the amount.
4 drawbacks of term deposits
- Term deposits rarely offer compound interest
Most term deposits use a fixed interest rate which is payable upon maturity. This means you receive a lump sum of interest on the final day of your term deposit. As such, your interest never gets a chance to earn more interest, and doesn’t benefit from the “eighth wonder of the world” – compound interest.
- No saving rewards or bonuses
Term deposits do not offer introductory interest rates or bonuses for regular contributions; in fact, you cannot contribute extra into your term deposit for the entire time it’s locked up. While some banks offer temporary rate increases if you opt to reinvest your funds for a second term, if you are truly looking for incentives and bonuses for regular saving – opt for a high interest savings account.
- No ability to top up your account
As previously mentioned, you cannot contribute extra money into your term deposit to help it grow. Instead, the most you can do is open a new term deposit once you have enough money to warrant doing so.
If you enjoy the comfort of locking your money away, yet still wish to regularly save, you could use a term deposit in conjunction with a high interest savings account. Essentially you save regularly each month into your savings account, and only once the balance reaches your goal do you invest it into a whole new term deposit.
- Lack of flexibility
While being locked out of your money can force you to save, it also prevents you from easily accessing it in an emergency without paying a penalty fee; this fee can entirely negate your investment (and in some instances, reduce your investment).
If you think you may need to use the cash in the short to medium term, opt to either do a smaller term deposit length or use a high interest account instead.
3 features to look for when comparing term deposits
Given term deposits are rather simple to compare (they have nearly identical features) – there are only three things you must look for when searching for your next term deposit.
- The highest possible interest rate
Self-explanatory; you want your money to make you more money. Compare term deposits that have the highest interest rates available and in the case of having over $50,000 – start talking to local banks about what kind of offer they can provide.
- The lowest possible break fees (just in case)
Unfortunately, bad things can happen in life. Sometimes we are required to break our term deposits and delve into our savings. While you may not intend to from the outset, it may be wise to choose a term deposit that has minimal fees for breaking the term. Sacrificing interest is an acceptable break fee, sacrificing any of your original investment is not.
For this reason, it’s suggested you get your ducks in a row before opening an account. Ensure you have a water tight budget that is accounting for any future expenses that may arrive.
- Ability to have interest paid monthly (not on maturity)
A select few term deposits are now offering you the ability to select when you would like your interest paid. Choose from monthly, quarterly, annually or at maturity. Given the nature of compound interest, monthly is ideal and in many cases, will negate the lower interest rate you think you will be getting.
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