How to make the most of your savings?
Savers are getting walloped in the current interest rate environment with Canstar data showing the gap between deposit and lending rates has widened to its biggest break in over three years. The Big 4 have been slicing savings rates by much more than mortgage rates, citing increased wholesale funding costs and the need for better profit margins.
It’s a tough blow for savers as the banks seem content to cut their deposit interest rates by the full amount of any RBA cuts. So what can you do to make the most of your savings in such a stingy depositing environment?
The best thing is to shop around for a better all round savings account. But don’t just look for the best interest rate on the market, check out all the costs and benefits on offer from each financial institution. It might sound like a big effort but the power of compound interest and varying bank fees will make the effort worthwhile.
Getting down to the nitty gritty of it, here are the four key things to consider when shopping for a savings account.
- Interest rate
This is obviously one of the most important considerations in choosing a savings account, but be careful because the highest isn’t always the best. The interest rate on a lot of savings accounts depends on the amount in there. Often this means you need to maintain a minimum amount in your account to qualify for the advertised rate.
The critical thing is to balance what interest rate you want with the amount you can reliably afford to maintain in the account. Of course if you can keep a high balance and build on it you should get an account that adequately rewards you for this. It’s all about finding an interest rate and terms to match your savings pattern.
- Ease of access
It makes sense to choose a product that suits you from the start rather than having to change your habits to suit the account. Choosing an account that allows access to your money when you need it, whether that means avoiding a fixed term, having ATM’s close by, iPhone payment capabilities, bill paying options or convenient banking hours is important.
If you don’t choose an account with access and options to suit your lifestyle then it’s likely you’ll be hit with more fees as you use the account in a way that is convenient anyway
- Fees and charges
There are three main types of fees and charges to look for in a savings account; transaction fees, account keeping fees and on-off charges.
Transaction fees are those attached to moving your money around and are usually charged per transfer or withdrawal. Account keeping fees are usually charged at a flat rate per month and include a certain number of free transactions. One-off charges are for things like bouncing checks, overdrawing the account and getting additional bank statements. These should all be considered individually.
Ideally they will all be the lowest available. But failing that, weigh them up in terms of your circumstances. For example, if you don’t plan on making regular withdrawals then trading off high transaction fees for low account keeping fees is a good option.
- How long you need to commit your money
If you’ve saved up enough for a big purchase, like a home deposit or car, and will make a decision soon then quick access to funds is essential. But if the decision isn’t likely for a while then a term deposit could be a better option as the interest rate is higher and the funds locked in for the specified term.
Now that you’ve identified a suitable savings account it’s time to build on that kitty of funds. The best way to do this is by understanding where your money is going, setting a savings goal, clearing debt, and organising a monthly cash transfer.
- Know your spending patterns
I know this sounds boring but sit down and write out all your daily, weekly and monthly expenses… you’ll be surprised how the smaller expenses add up but you’ll also have a much better handle on the areas to concentrate saving efforts on.
Once you’ve identified the areas where a bit can be trimmed off your budget, make firm commitments to stick to them.
- Set a goal
Saving is always much easier if you have a goal to save towards… a deposit on a house, holiday at the end of the year, a new car or just a certain amount. Whatever the inspiration, keep it front of mind every pay day and make regular contributions to the account.
Having a savings goal is a great motivation to rein in impulse buys and stick to a budget.
- Clear debts
Looking at how much you pay each month to service debt will show just how expensive borrowing can be. By clearing debts you can easily redirect those repayments toward savings using the same discipline you have toward debt repayment. That is, make a compulsory minimum contribution each month to your savings.
- Set up a monthly transfer
One of the best ways to get into a savings routine is to set up a monthly cash transfer into a savings account that coincides with salary or pension payment days. If your salary increases, so should the amount that gets tucked away each month.
Putting money away on payday takes the pain out of scrimping to save at the end of each month because the money isn’t sitting in your spending account as a temptation.
Putting these savings steps in place is just the start though; sticking to them is the difficult bit. But with a little bit of awareness and a whole lot of willpower you’ll have that ideal savings account ticking over nicely. All the while compound interest will be doing its marvellous thing.