part 2 savings

Crash course in savings – Make your money work

Lesson 2: How to maximise your savings with the Optimal Savings Model

Once you're committed to saving and budgeting, it's time to master the art of making your savings work as hard as possible. This means keeping a keen eye on current interest rates offered by banks, any bonus offers and most importantly, understanding how different types of savings accounts can help increase your savings balance.

Before we look at how best to leverage interest rates and savings accounts, let’s decode the basics. A good understanding of the basics will go a long way when comparing and finally, opening a new account to support your savings plan.

Decoding the basics

Variable interest rate

Variable rates are subject to change over the course of your account’s lifetime. The changes are due to economic fluctuations and if the Reserve Bank of Australia (RBA) lowers or raises the industry benchmark, known as the RBA Cash Rate.

Standard interest rate

The standard variable rate is the base interest rate that an account has with no bonuses put on top. This is the minimum interest rate you can get with that account (unless rates are lowered).

Maximum interest rate

The maximum interest rate is the most you can get from the account, calculated by adding bonus or in some cases, introductory interest rates to the standard variable rate. This rate is typically awarded if the account holder meets certain criteria. For example, bonus interest may be awarded if a certain amount is deposited into the account each month or if no withdrawals are made.

Bonus Interest

If you meet a certain criteria, you might be awarded a bonus interest rate on top of your account’s standard one. The criteria ranges from being a new customer to loyalty bonuses for monthly deposits or having your transaction account with a specific bank.

Minimum balance or deposit

Few accounts require a set contribution (minimum deposit) in order to open them and others require that your funds never fall below a certain amount (minimum balance).

Account fees

Many banks charge fees to keep account open and functioning. These fees are generally charged monthly and can be waived with some types of accounts like internet savings accounts or cash managements accounts that have over a certain amount in them or that receive a minimum monthly deposit.

What type of savings accounts can I open?

In order to make your money work, it's also important to understand the differences between the different bank accounts and the types of savings accounts that are offered by banks or credit unions.

High interest savings account

As the name suggests, a high interest savings account is characterised by the comparatively high rate of interest offered on your balance. High interest rates can come in the form of incentive or bonus saver accounts or introductory offers. Online savings accounts may also offer high interest rates.

Incentive or bonus saver account

Incentive or bonus saver accounts award you with bonus interest if certain criteria are met. The criteria will differ between different accounts, however, the bonus interest is designed to provide extra incentive to save.

Introductory offers

While not a savings account type as such, some types of savings accounts can come with introductory offers in the form of bonus interest. The bonus interest is offered during an introductory period, for example, the first four months of opening an account. Introductory offers can result in rewarding interest earnings on your balance, allowing you to grow your balance in a shorter amount of time.

Online savings account

An online savings account lets you manage your savings online and typically offers higher interest rates. Often, these accounts must be linked to a transaction account to enable you to deposit money or transfer funds from one account to another.

Cash management account

These accounts are almost a hybrid of transaction and online savings accounts - so long as you have a sizeable bank account (typically at least AUD$5,000), you won’t pay account-keeping fees while enjoying a high interest rate and still being able to access your money through a debit/bank card, usually with free transactions as well.

Transaction account

Transaction accounts are your everyday spending accounts, typically linked to a bank or debit card so that you can access your cash from ATMs, online or other forms of withdrawal access points. While not a savings account as such, there are some transaction accounts that allow you to earn interest.

The benefits of each savings account

Savings accountKey benefitWhat’s the catch?Compare
Introductory offerThe added introductory interest rate could boost your savings balance in a short periodYou only receive the bonus rate for the first few months (usually up to four) so assess your situation once the introductory period ends Compare introductory bonus saver accounts
Bonus saverThe bonus interest doubles as as an incentive to meet certain requirements such as putting a minimum amount away each monthThe bonus interest rate is only available if you meet certain conditions so it's important to commit to truly maximise the interest rate on offerCompare bonus saver accounts
Online savings accountTypically offer competitive interest rates and minimal account feesSome online savings accounts don't allow direct debits and must be linked to a transaction accountCompare online savings accounts

How to take advantage of competitive interest rates

If you’re new to the finance game, then you’ve likely got all your money in the one account with the one bank. Likely, that bank is the one you signed up with first and you’ve stuck with them simply because you’re not bothered to or unwilling to change. There are advantages to sticking with one bank account: you only need one login/pin code or you just have to visit the one branch to get all your finances sorted. However, the limitations far outweigh any benefits you may get.

If you’re serious about optimising your interest earnings, you’re going to want to switch over to the Optimum Savings Model. It’s not hard or won’t take too long and you can do it all sitting right where you are now.

What is the Optimum Savings Model?

Co-Founder and Director Fred Schebesta explains how to take advantage of competitive interest rates.

Step 1: Research and compare

Find the account with the highest maximum variable rate p.a. (more than likely an internet savings account).

Step 2: Open an account

You’ll need a few personal details like your name, date of birth (D.O.B), address and tax file number (TFN) and you might want to download that bank’s smartphone app to keep up with your finances on the go.

You’ll want to port over as much of your savings as you’re willing to put away - ideally, you won’t be taking out of this new account too much as you can only access the funds via electronic transfers.

To get the most out of this account, we suggest you put as much of your weekly, fortnightly or monthly earnings into this high interest savings account as you can. The more money you have in the account, the more interest you earn. Some banks calculate interest daily, even if they only pay it out monthly, so the more cash you have in your account for longer, the more interest you could earn. You should leave only spending money in your transaction account so that the bulk of your money is earning interest in a high interest savings account.

Remember, some accounts also give you the ability to earn compound interest. A savings account with compound interest applies the interest to interest that has already been paid to you. This occurs with accounts where interest is paid directly into the account on an on-going basis.

Step 3: Schedule a reminder to switch

Make sure you set yourself a reminder to switch over your account at the end of its introductory rate period. You can put it in your date book, on your calendar or set up a notification with your phone. Any method is good.

Step 4: Switch to a new account

Wait until that account’s introductory bonus interest rate is exhausted, typically 4 to 6 months in. That account’s interest rate will revert to the standard variable rate which can be over 1% p.a. lower than the maximum you’ve been enjoying for the past few months.

Head back to our Savings Account Comparison and pick the next highest maximum variable rate to open an account with. Transfer all the funds currently sitting in the account you created in step 3 and enjoy the continued high interest earnings caused by a bumped up interest rate.

Step 5: Rinse and repeat

You’ll be getting the best interest rates on the market and your savings could grow much faster as a result, but only if you’re diligent and persistent.

At first, the interest you earn may not seem like much in the overall scheme of things, but wait it out. Once you’re into the thousands, tens of thousands and beyond, a difference of 1% interest p.a. can mean thousands of dollars earned in just a few short years.

Clarizza Fernandez

Clarizza is finder.com.au's assistant publisher for banking and investments. She works to empower consumers in making informed decisions on all things banking and investments. In her spare time, she Googles: 'Sydney's best dog parks' and 'Best pasta Sydney.'

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