With interest rates so low, are savings accounts still worth it?
Interest rates on Australian savings accounts are at record lows, but there are a few key benefits to keeping cash in a savings account.
Yes, interest rates on savings accounts are low at the moment. Even the online banks like ING and UBank, traditionally well-known for their competitive savings rates, are offering just 1.50% p.a. and 1.46% p.a. on their high interest savings accounts. And these are still among the highest on offer in the market.
This is thanks to the official cash rate, as set by the RBA, also being at an all-time low at just 0.25%. This is great news for people borrowing money (you can now get a home loan rate under 2.50%), but not so great for savers trying to earn interest on their money.
However, that's not to say that savings accounts are now pointless. Aside from interest, savings accounts offer several benefits to customers.
Savings accounts are safe
Keeping your cash in a savings account is one of the safest options for your money. This is because your deposit up to $250,000 with an Australian bank is protected under the Australian Government Guarantee Scheme.
Under the scheme, in the unlikely event that something were to happen to your bank the government would guarantee your cash deposit up to this value. It's designed to encourage Australians to keep their money with Australian banks.
Digital banks 86 400, Volt and Xinja have been granted banking licences so are also included in the scheme, as is Up Bank which uses the licence of Bendigo and Adelaide Bank.
The money in your Australian bank account or term deposit is protected under this scheme as well, as they're deposit products. However the money you invest in the sharemarket, your super or a property is not.
You can easily (and quickly) access your money
Another key benefit of savings accounts is they're extremely liquid. This means the money can be quickly and easily turned into cash as soon as you need it.
For example if you had a large, unplanned expense pop up (perhaps an unexpected medical bill) you could use the cash in your savings account within minutes. As a comparison, if that money was in shares you'd need to firstly sell your shares, wait for the money to settle in your investment account then move it into your transaction account. Plus, you may also need to sell your shares at a loss.
Property is much less liquid. If all your money was tied up in your property, you'd need to apply to redraw on your mortgage, borrow more money against it or, depending on the size of the expense, sell.
Your balance won't go down
If you were to put your money in shares, the value of your shares can go up and down a lot. If the shares you've bought are performing badly, they might be down in value for many months at a time before rising back up again (or they might not rise again at all). Of course the opposite is also true, and they could rise in value very quickly after you've bought them.
This isn't the case with the money in your savings account. Unless you choose to make a withdrawal, your balance won't go down. So you may not be earning as much money in interest as you once were, but you're still not losing money with a savings account.
All of this isn't to say that the interest rate you're getting isn't important – it is. The higher the interest rate, the more money you'll earn in interest and the quicker your savings will grow. So it's definitely worth your time to compare savings accounts and look for one with a higher rate.