Your savings are an investment. They are not something that should be plonked into the same old savings account because that is what you have always done. You can, and should make your savings work harder. With the latest round of interest rate cuts, interest rates are low and it is now even more important to make sure you are getting the best possible return for your savings. “Don’t I just pick the account with the highest rate?” I hear you say. Yes, generally speaking, but like most things it is not as easy as just that. So here are a few things you need to look out for in choosing the best possible a savings account for your cash.
- What is the interest rate? I know it is an obvious one. The higher the better but there are a couple of tricks when looking at the rate. Firstly, you have to be clear whether it is a bonus rate or not. Bonus rates are an introductory offer which lasts for a period of time before the account reverts back to the regular interest rate. The bonus period generally lasts from 3 to 6 months. The trick is that once that period is over the difference in interest rate can be quite large. For example one account I was looking at had a bonus rate of 4.6% but then reverted to 2.75% after 5 months! There is nothing wrong with taking a bonus rate just as long as you know that is what you are doing and you are clear what rate the account reverts to. In fact, you can take advantage of them then move when the rate ends if there is a better deal on offer. Just make sure the account allows you to do this.
- How often is the interest paid? The trick is, the highest interest rate is not always the best as how often the interest is paid is an important factor too in determining your investment earnings. Generally speaking the more frequent the interest payments the better off you are. This is due to the power of compounding (click here to find out more about compounding). So, when looking at two investments at the same interest rate, the one with the more frequent interest payments is better. For example, a $10,000 investment at 4.7% paying interest monthly will make you $10 more interest over 1 year than the same investment paying annual interest. It doesn’t sound like much but run that investment over 5 years and the difference is $61. We all know every little bit helps! Click here for a calculator to check out the impact of compounding and interest rates on your savings and to help you compare accounts.
- Fixed vs variable interest rates? Most basic online savings accounts and cash management accounts pay variable interest rates. This means that the rate of interest that you will be paid will rise and fall with changes in official interest rates. Fixed rate investments, such as term deposits pay the same rate of interest during the term of the investment, regardless of what happens to official interest rates. Fixing your rate is a good strategy when interest rates are falling because you lock in a rate but when rates are rising you miss out on higher rates during the term of your investment.
- Are you locked in? In financial speak we call that the term of the investment. Most online savings account give you easy access. Term deposits lock your money away for a specified period of time.
- What fees are involved? Fees eat away at your returns. Given the low interest rate environment it becomes even more important to make sure you have a fee free account.
- Is there are minimum balance? Be clear on whether the account has a minimum balance and whether you make that criteria.
- Other features. Be clear on what sort of other features you would like to have on the account. Do you want ATM access or do you want to limit access so you are less likely to raid the cookie jar :-).
So as you can see there are lots of factors that need to be taken into account when choosing the best savings account for you. One of the best ways to compare all these factors is to use a comparison site. These site don’t cover the whole market but they can certainly give you a good idea of what is out there and help you on your journey to get more out of your savings.
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* Please note this is for your general information only and does not constitute financial advice. Please see a financial planner or accountant to get advice specific to your individual needs.