How can you be sure that you are getting the best interest rate for your hard-earned savings?
The purpose of keeping your money in a savings account is that it provides you with a secure way to earn interest while it’s not in use. The interest rate being offered by a savings account is the main indicator of how fast your account balance will grow. If you are not calculating the interest correctly, you could make the wrong choice about the high interest savings account that is right for your needs.
Compare interest rates below
How does an interest rate comparison work?
When interest is calculated, when it is deposited and if the account allows for compound interest will all be determining factors when comparing interest rates. If you are not looking at the entire interest picture for savings accounts, you could be missing key points that will determine your interest earning capacity.
How are interest rates calculated on my high interest savings account?
Interest on an online saving account is calculated by this formula: Daily closing balance/365 x Interest rate/100
If you are comparing high interest savings accounts and wondering about the significance of having the interest calculated daily and paid monthly, it basically means you will earn more interest. When interest is calculated daily, it is calculated on compounding interest.
To calculate what the rate on their savings and term deposit accounts will be, most banks will base their rate on the RBA's cash rate. Some banks will add a certain percentage to the standard rate for a promotional period, or lock in a rate several percentage points higher than the cash rate on a term deposit account.
How do I actually compare interest rates?
Don’t stop at the advertised interest rate when making savings accounts comparisons. There are various points to consider that will help you determine which savings account is best for you.
- The base rate. The standard interest rate is where your comparison should start. Check to see if it is variable or fixed and how it compares against other savings accounts.
- Bonus rates. Some banks will offer an introductory bonus rate on a savings account. This rate is usually advertised as a fixed rate on top of the standard. Check to see for how long that rate is in effect, and if you need to meet any requirements in order to maintain it.
- Compound interest. Ideally you want a high interest savings account where interest is calculated daily and paid into the account monthly. This allows you to grow your savings faster by being paid for interest that you have already earned.
- Terms. Check to see if the interest rate is only applied if you are able to meet certain conditions, such as maintain a minimum balance or make a limited number of withdrawals.
Tips for comparing interest rates
- Choose the interest rate which suits your savings goal – If a high introductory interest rate expires in 4 months' time but you can save for your new TV or summer holiday before then, you can take advantage of the high rate and not worry about the lower standard rate.
- Compare promotional and introductory interest rates – If a savings account has a promotional rate, it is important you compare both this rate, and the account's standard rate. While an account may have a higher initial rate, if you can find a higher standard rate on another account, you could be better off in the long term.
- Look for flexibility – Interest rates are predicted to keep going up for a while longer, which means that if you are locking in a term deposit account, look for an interest rate which is not likely to be exceeded by those of online savings accounts in the next few months. Or choose a term deposit account which lets you upgrade your interest rate, or withdraw for an early exit to a better investment option.
Any pros and cons?
Interest rates are not the only important feature for a savings account. When making your comparisons check for:
- Linked account. Savings accounts typically need to be linked to a transaction account in order to facilitate the transfer of funds. Check to make sure that by opening a savings account in a different bank, you can still use your current transaction account to link them.
- Bonus rates. An introductory bonus rate on interest can give you a big boost towards meeting your savings goals.
- Security. Ensure that the financial institution is a part of the Australian Government Guarantee Scheme, which protects your deposits of up to $250,000 per person per institution.
- Fees and penalties. Certain monthly fees could apply to saving account products as well as penalties for early withdrawals. Read the fine print carefully to ensure that you are not losing the benefit of a high interest savings account in other charges.
- Balance requirements. You might be expected to open the account with a certain amount of funds, or have to maintain a minimum balance in order to avoid fees.
Tax implications in Australia
Any interest earned on a savings account in an Australian institution is taxable as income in the country, unless exempted by the ATO. This includes earnings on children's savings accounts, term deposits, and life insurance bonuses. However, you can claim deductions on expenses tied to earning the income. This can include account-keeping fees from the bank, management fees, or financial consultations. If you do not give your tax file number to your bank, an amount corresponding to the highest tax bracket will be withheld, but you will get a refund for the difference, if any, once you provide the number.
What are the risks?
You could easily not meet your savings potential by not weighing the type of savings account and the interest rate carefully. In order to avoid this, make sure that you are:
- Choosing the right account. If you are savings towards a goal that is a few years off, you’ll get the highest return with a term deposit account.
- Not mistaking a bonus rate for the standard. Check the advertised rate carefully, as this may just be the introductory or bonus interest. The standard rate is what will be applied after the bonus period ends.
What other factors could affect the amount of money I earn in interest from my savings account?
The biggest factor is fees, which can come from the savings account itself, or the required linked account. Other costs to consider are penalties for early withdrawals and bank transaction fees.
Do rates change depending on my balance?
With some accounts the rates will be different depending on how much money you have in savings.
How is interest calculated?
For high interest savings accounts, the interest should be calculated daily and paid into the account monthly in order for you to get the benefit of compound interest. This is where you are earning on the principal amount as well as any interest payments already received.