Interest rates are on the way down, and for savers this may means saving rates are too…
While the Reserve Bank of Australia (RBA) left its official cash rate steady at 3.25 per cent on Melbourne Cup day, most economists expect another reduction before Christmas or next year.
Higher consumer prices may have constrained the central bank in November, but financial markets are currently predicting 0.57 percentage point of cuts over the year ahead. This would reduce the official rate to below its level last seen during the GFC, bringing down average term deposit rates to the low 4 per cent per annum range.
Currently, most online savings accounts are paying around 3.5 per cent, marginally above the official cash rate.
With the cost of living continuing to rise, switching from transaction accounts to high interest savings accounts, such as those offered by RaboDirect, can help maximise returns.
Choosing an online savings account can make it simple and convenient to transfer funds from your everyday transaction account used to cover expenses. And with no switching costs, it makes sense to chase the higher saving rates available.
However, you will need discipline to not dip into the savings account for impulse buys, thereby ensuring it gradually increases in value from regular contributions and interest payments.
Compound your advantage
Fancy giving your newborn son or daughter an 18th birthday present they will never forget?
According to ASIC’s MoneySmart website, it is possible to turn $20 a week into nearly $30,000 in just 18 years, assuming a conservative 5 per cent annual return and that no withdrawals are made.
This is achieved by using the power of compound interest, which in this example would contribute $11,277, compared to the $18,720 of contributions over the period.
Choosing the right account
Deciding on the right savings account requires consideration of a range of factors. RaboDirect, for example, offers high interest savings, term deposits and a PremiumSaver account, all with different features and interest rates.
Some of the features to consider are:
- Rate of interest, payment dates and whether any introductory rates apply.
- Account-keeping fees.
- Minimum and maximum account balance.
- Any rewards for regular deposits, or penalties for withdrawals.
- Bank requirements for a linked account.
- Whether the account is offered by an authorised deposit-taking institution regulated by the Australian Prudential Regulation Authority.
It is important to compare apples with apples, such as the standard variable rate, rather than the honeymoon rate on offer.
However, any interest received from the savings account is required to be declared in your annual tax return. In addition, savings accounts may not be as accessible as regular transaction accounts, with possible penalties if you are required to make a sudden withdrawal in an emergency. This is most likely with term deposits.
Yet while shares, property or bonds offer potential for higher returns, retirees and others with shorter time frames may want to consider keeping their funds in savings accounts and term deposits. The National Savings and Debt Barometer by RaboDirect shows those who are closer to retirement are less likely to be drawn towards long-term investments.
After all, a guaranteed positive return of 4 per cent on a term deposit is still vastly superior to the negative 7 per cent returned by the benchmark S&P/ASX200 index over the year to June 30th 2012, or the 3.6 per cent average fall in house prices during the same period as reported by RP Data.