Saving for Christmas

The change isn’t in the concept of saving, but in the banks that offer the service. Online banks, which have no physical location and therefore much lower overhead, have proliferated in recent years, and now claim 22% of the Australian deposit market. These banks can offer substantially higher interest rates than traditional banks, with 5–7% possible on their savings accounts.

The principal of saving for Christmas has remained the same: even a small amount, such as $10, put aside faithfully every week, plus the interest accrued, can equal a tidy sum at the end of a year. Or, if you have a chunk of money available (a bonus or tax return, say), a high-yield account with restricted access can bring in even more interest income. In between are cash management accounts, with interest compounded daily but at a lower rate than a high-yield or online account, although still a better rate than many traditional savings accounts.

Smaller financial institutions, eager to attract new customers, are also offering higher interest rates than traditional banks.

Prior to opening a savings account, do some research to maximize your savings. Terms and conditions vary dramatically between institutions, so read the fine print carefully.

Sometimes higher interest rates are cancelled out by correspondingly higher fees. Although industry reports claim that overall banking fees are lowering, other sources tend to dispute that claim, including many of the people paying the fees! Check to make certain that monthly maintenance fees, or transaction fees should an emergency force you to access your principal, aren’t going to eat up all the interest your money has earned.

Sometimes the higher interest rates are only an introductory offer, then after a few months the rates drop; and sometimes the higher rates only apply to higher balances, which can be difficult to maintain.

One point to consider when deciding on a savings account is how often the bank pays the interest into your account. That increases the amount of money in the account and therefore the amount of interest that will be paid the next time it’s calculated (compound interest). A bank may compound the interest daily for a savings account, but only pay on a monthly or quarterly basis. Look for an account that pays the interest daily, and watch your savings grow much faster.

Even the old-fashioned Christmas club savings programs offer higher interest rates than some standard savings accounts. The money in a Christmas club account is not available until November 1, without incurring a penalty, so you aren’t as tempted to dip into your savings until the proper time. These accounts often have no monthly maintenance fee, and you can have your pay deposited into the account then transfer what you need into your everyday account.

Article correct at its author date: October 2007. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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