Savings accounts for dummies: What are they and how do they work?

Choosing the right savings account can help grow your savings.

A savings account is likely the most popular banking product after your everyday account. Unlike the transaction account these typically limit your access while paying you interest on your earnings in order to help you reach whatever financial goal you have put into place.

What is a savings account?

Your banking account, sometimes referred to as a transaction or everyday account, is specifically designed to take care of your daily financial needs. They will have special features that allow you to easily access your money, make purchases using the money that is in the account, receive deposits and pay your bills.

A savings account may also have some of the same features, but it is structured to help you not to spend the money deposited by limiting your access and paying you interest on the balance that is in the account. In most cases you will not be charged a fee for a savings account, but depending on the type there could be terms such as minimum balance requirements and limits on how often you can make a withdrawal.

How does a savings account work?

The mechanics of a savings account is relatively simple. You deposit money into the account either consistently, or as a lump sum deposit if you are opening a term investment, and an interest rate is applied to that balance daily in most cases. Depending on the features of the account you have chosen, those payments of interest will either be paid into the account at predetermined intervals or into a separate account.

manBrian has reached his 25th birthday and has become interested in the idea of buying a house in the future. He opens a savings account with the intent of putting money on the side that will later be used as a down payment. Brian sets up an electronic deposit of his pay slip where a specified amount is sent to this account each month. In addition, the bank makes a monthly deposit of his interest payment, allowing him to earn money in interest on money that was paid to him by the bank. This feature allows him to grow his savings even quicker than he had first realised.

When you have a feature that pays the interest into the account, you are able to earn what is known as compound interest. This is where your interest payments are added to your account balance so that the next time interest is calculated, those funds are included. This allows you to earn even more money in interest the next month, even if no deposits are made by you.

How do I find a savings account that is right for me?

When beginning your savings journey, the first step is to determine what your goals are and what type of savings product will help you in meeting them. A casual saver with no particular plan in mind right now may appreciate the flexibility of an online savings account, while others who are determined to increase their money through interest will want to look more closely at bonus saver accounts or term deposits:

  • Introductory bonus savings account. With this type of savings product you may earn a higher rate of interest for a specified amount of time after the account has been open. These accounts are exclusive to new account holders, and the interest rate will revert to the standard once the bonus terms end.
  • Bonus saver accounts. With bonus saver accounts you can continually earn a higher interest rate so long as you are able to meet the terms set forth by the bank. This will usually include making a certain minimum deposit amount each month and limitations on the numbers of the withdrawals. If you fail to meet the terms for one month, the base rate will be applied to the balance, but you have the chance to earn bonus interest again in the following month.
  • Online savings accounts. Online savings accounts provide you with a convenient way of earning interest on your deposits. Interest rates tend to be higher with this type of account, but you are limited to how you are able to make your transactions.
  • Retirement savings accounts. There are special accounts available for Australians who are over 55 and receiving pension benefits. These accounts double as your transaction while still paying you in interest on the balance in accordance with the Australian tax policies.
  • Kids savings accounts. Some banks will offer higher rates and lower transaction fees for Australian children who have a savings account. These can also be structured like a bonus saver account, yet with terms that are easier to meet for younger people.
  • Cash management account. A cash management account is for those who have a significant amount of money to invest in a savings or investment product, yet still want to maintain control and flexibility over the money.
  • Term deposits. These are fixed rate savings accounts that demand a minimum deposit amount which will then become inaccessible to you over a length of time that you choose. While the rates may be higher, you could be charged penalties and lose that advantage of a higher rate if you need to access your money before the terms expire.
  • Notice savers. This is a fairly new type of savings product being offered by some Australian financial institutions. The structure is similar to the term deposit, except rather than choose the length of time for the investment, you choose how much notice you will need to give in order for the funds to be made available to you.

What are the elements of a basic savings account?

Your most basic of savings account should have the following features:

  • A base interest rate that is applied to your daily balance.
  • No monthly service fees or transaction charges.
  • No mandatory deposit amounts into the account.
  • No limit on the number of withdrawals you can make.
  • Accessibility online and in a branch.

How do I pay tax on my savings?

There is no tax applied to the amount of money that is in your savings account, but you could be subject to tax on any interest that is earned. Interest is considered a form of income and should be included in your yearly tax forms before lodging the return. You can simplify this by providing the bank with your Australian tax file number (TFN) at any time when opening the account or even after it has been activated. With this information, the amount that you earned in interest in the amount deducted for withholding by the financial institution will appear pre-printed on your electronic tax documents.

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What are some regulations in place to protect my savings?

Under the majority of circumstances you can feel secure with your savings in an Australian financial institution. Deposits of up to $250,000 are protected by the government guarantee, and banks are required to hold a certain percentage of capital in order to cover customer deposits. This capital buffer was just recently increased for the four largest banks in Australia as added protection for consumers.

You may also be interested in

Compare savings accounts below

Rates last updated August 21st, 2018
Name Product Maximum Variable Rate p.a. Standard Variable Rate p.a. Bonus Interest p.a. Fees Min Bal / Min Deposit Interest Earned Product Description
RaboDirect High Interest Savings Account
$0 / $1
Introductory rate of 3.05% p.a. for 4 months, reverting to a rate of 1.80% p.a. Available on balances below $250,000
ING Savings Maximiser
$0 / $0
Ongoing, variable 2.80% p.a. when you link to an ING Orange Everyday bank account and deposit $1,000+ each month and make 5+ card purchases a month. Available on balances up to $100,000.
AMP Saver Account
$0 / $0
Introductory rate of 2.55% p.a. for 4 months, reverting to a rate of 2.10% p.a. Available on balances below $5,000,000.
Bankwest Hero Saver
$0 / $0
Ongoing, variable 2.60% p.a. rate when you deposit at least $200 each month and make no withdrawals. Available on balances up to $250,000.
AMP SuperEdge Saver Account
$0 / $0
Link to your SMSF. Ongoing, variable 2.05% p.a. when you link to AMP SuperEdge Cash Account or a different transaction account for your SMSF in another bank. Available on the entire balance.

Compare up to 4 providers

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Shirley Liu

Shirley Liu is a program manager at finder, formerly the publisher for Banking and Investments. She is passionate about helping people make an informed decision, save money and find the best deal for their needs.

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Savings Account Offers

Important Information*
RaboDirect High Interest Savings Account

Maximum Variable Rate


Standard Variable Rate

ING Savings Maximiser

Maximum Variable Rate


Standard Variable Rate

Bankwest Hero Saver

Maximum Variable Rate


Standard Variable Rate

AMP Saver Account

Maximum Variable Rate


Standard Variable Rate


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