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Better ways to save - HISA and term deposits

Tags Financial Lessons Financial Planning
Category Save

With the global economy still lingering in uncertainty, Australians have noticeably begun to reduce their credit card debts, while at the same time looking to increase their savings balances. A high interest savings account (HISA) or term deposit could be just what you need to kick-start a healthy savings regime.

According to the RBA’s Financial Stability Review in March 2012, the average household saving rate has hit 9.5 per cent, and many households are paying off their debt faster than required.

In reaction to this marked shift in how Australians are managing their personal finances, many banks have started rolling out high interest term deposit and online savings accounts. This noticeable turn towards old school banking is great news for those who understand the power of a penny saved.

HISA

What is a HISA?

A HISA is an online account that offers unusually high rates of interest, typically varying between 5 and 6 per cent p.a. That’s pretty impressive considering you’d be looking at half of that for an average savings account.

While online banks are able to offer these rates because they don’t have to contend with the high operating costs associated with traditional banks, there has been a recent surge in major banks offering their own online-only high interest savings accounts. There are now dozens of banks, domestic and foreign, big and small, that offer remarkably high interest rates for their savings accounts.

Benefits to you

  • For most HISAs, interest is calculated daily and paid monthly. This means you’ll be earning interest on your interest.
  • Many online accounts have no account keeping fees, no minimum balance to maintain and no minimum term for depositing your money.
  • As the account is online, all transactions are conducted on the internet or over the phone. This makes managing your finances efficient and convenient, as you can check balances or make transfers 24/7.

Term deposits

What are term deposits?

Term deposits are similar to HISAs, in that both offer excellent high yield interest rates. The main difference is that a high interest savings account has a variable interest rate, while a term deposit is typically fixed. Much like the differences between a fixed and variable home loan, there are similar pros and cons.

Term deposits can be either be short or long term, and you will generally get a better rate if you lock your money away longer.

You may prefer a term deposit if you are concerned about volatility and want the assurance of a fixed rate you can rely on. An example would be if you are budgeting for something in the distant future where you will need a precise sum of money.

The obvious downside is that you cannot take advantage of increases in the interest rate, nor can you withdraw the money at a moment’s notice without having to pay hefty penalties.

Benefits to you

  • Like a HISA, banks are offering highly competitive interest rates on both short and long-term deposits. If you have a sum of money sitting in the bank, now may be the best time to consider a term deposit.
  • Because the interest rate is fixed for the term of the deposit, a term deposit is one of the safest investments you can make. In today’s highly volatile market, interest in term deposits has noticeably increased.
  • Term deposits are ideal if you do not need access to the deposit funds, but need a guarantee on returns upon the maturity of your deposit.
  • You can invest your self-managed super funds into a term deposit, giving your retirement savings a significant boost.
  • Forced savings. Because there is a significant penalty for taking money out before the maturity date of your deposit, having a term deposit might be beneficial if you are prone to wavering from your savings plan.
  • You can have a strong and stable long-term income by employing a laddering investment strategy to your term deposit.

Whether you’re looking for a savings account that will earn you profits from its high interest rates, or prefer the stability of a term deposit for safe investments, there is an ideal account out there to suit your savings needs.