What are some hazardous saving conditions?

If a deal on a high-interest savings account sounds too good to be true, watch out for these traps and pitfalls.

Depositing money into a high-interest savings account is a great way to make your money work harder. By setting up regular deposits, you can earn a great rate of interest on your savings and build a sizeable balance.

When shopping around for the best savings accounts, you might come across advertised promotions and high interest rates that sound like a good deal. However, there are often a range of terms and conditions that make these savings accounts less than ideal. Let’s take a look at some hazardous conditions attached to savings accounts and how you can choose an account that offers the best value for money.

Savings conditions to watch out for

1. Introductory interest rates don’t last for long

Many online savings accounts are offered with a special introductory interest rate that is noticeably higher than the standard interest rate offered on most other savings accounts. This rate is also known as the honeymoon rate and what some people don’t realise is that this rate only applies for an introductory period (typically four months). When this period ends, the rate reverts to the bank’s standard interest rate, which may actually be lower than rates offered with other savings accounts.

2. You usually need to meet minimum monthly deposits

In order to continue to access the bonus rate of interest, some banks will require you to deposit a minimum amount into your account each month. Some funds may require you to deposit $1,000 per month without limiting the amount you can spend. While others may require a lower deposit amount but prohibit you from spending any of that money.

If you forget to make a deposit or if you experience a short-term cash flow problem, you won’t earn any interest on your savings balance for that particular month.

3. You can’t make withdrawals or you’ll be penalised

Some accounts feature a condition that limits withdrawals during a calendar month. For example, the introductory interest rate is applied if you make no withdrawals in the calendar month. Be very wary of this sort of condition if you plan on being able to access your savings every now and again to pay for day-to-day expenses or unexpected costs.

4. Transfer times can take up to a few business days

Check with your bank or financial institution to find out how long transfers to and from your savings account will take to be processed. For example, if transfers to the account take two or three days to be processed, this could result in you failing to meet the minimum monthly deposit requirements.

Alternatively, if you ever want quick access to some of the cash in your account to pay off a debt, you may have to wait two or three business days until the funds are transferred.

5. You may need to open a linked bank account with the same bank

Another common savings condition to be wary of is the requirement to open a linked account with the same financial institution. This is usually a transaction account but could also be a credit card account. The risk here is that in order to access the high interest rate on the savings account, you end up with another account you may not even need and which comes with its own fees and charges.

6. There could be hidden fees

Just as you should with any other banking product, watch out for any hidden fees or charges attached to your savings account. As well as monthly service fees and annual fees, check for any fees that may be attached to making withdrawals.

Uncovering the pros and cons of linking accounts

Matt’s Savings Mistake

matt-portraitSaving for a car, 24-year-old Matt decides to open a high-interest online savings account. He has a starting deposit of $5,000 and plans to deposit at least $1,000 in the account every month.

Matt decides to compare a range of account options and finds that, on average, most savings accounts offer an interest rate of 3.00% p.a. So when Matt finds an account with an interest rate of 3.50% p.a., he quickly signs up to open an account.

But what Matt doesn’t realise is that the 3.50% p.a. Interest rate only applies for an introductory period of 4 months. After that time, the account reverts to an interest rate of 2.55% p.a. Let’s take a closer look at the effect this will have on Matt’s savings balance.

Introductory rate accountBonus saver account
Initial deposit$5,000$5,000
Monthly deposit$1,000$1,000
ConditionsReceive 3.50% for the first 4 months and then reverts to 2.55%Receives 3.50% if he can deposit $1,000 per month
Interest earned$291.32$372.22

How do I choose the best savings account for my situation?

  • Read the fine print: The examples outlined above demonstrate that there are plenty of traps to be wary of when choosing a savings account, so always make sure to check the terms and conditions before opening an account. This will help you avoid any nasty surprises.
  • Compare your options: Make sure to compare multiple savings accounts before deciding on the right one for you. Look at the interest rate, any conditions attached, whether there are any hidden fees and charges, and how easy it will be to access your funds.
  • Know the difference between a base interest rate and a bonus interest rate: Many savings accounts come with a standard interest rate, for example 1.5% p.a., and a bonus interest rate which can only be accessed if you satisfy certain conditions such as depositing a certain amount each month. Make sure you’re aware of the difference between the base interest rate that applies and the maximum interest rate you can earn.
  • Set a savings goal: Are you saving for a home deposit, a holiday or just to have some money available ‘just in case’? A savings plan - working out exactly what you are saving for and how much money you want to save - will help you decide what features you want in an account and how long it will take you to save the money you need.
  • Create a savings plan: Work out a weekly budget to help you reach your savings goal as soon as possible. Putting money away on a regular basis, for example setting up a regular deposit straight from your weekly income, is a great way to build your balance as quickly as possible.

The features to look out for when choosing a savings account

The latest in banking

Jacob Joseph

Jacob is a writer and video journalist with Credit cards, personal loans and savings accounts are his bread and butter, and he likes nothing more helping people understand the sometimes overly complex world of personal finance.

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