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There is no such thing as free money

Research commissioned by RaboDirect, the online savings and investments bank, has thrown into question the age-old saying ‘there is no such thing as free money’.

RaboDirect has revealed that Australians are missing out on more than $4 billion in unpaid interest each year by keeping their money in low-interest bearing accounts. This amount could even be somewhat conservative, with the actual figure potentially reaching as high as $6 billion.

The issue is clear ”“ too many people are using the wrong accounts to house the bulk of their money.

The reason people continue to use the wrong accounts range from not understanding or being cognisant of different account types, through to simple inertia and nonchalance.

Thankfully the solution to the problem is just as simple ”“ consumers need to simply take action.

Rather than leaving money lying idle in a low-interest everyday transaction account, switching surplus savings to a high interest savings account (HISA) could essentially result in the payback of ‘free money’ in the way of interest.

The first step is to ‘look under the bonnet’ and make sure you know exactly what your account offers in terms of interest rates and account fees. There are a number of transaction accounts that are zero or low-interest bearing, being dressed up and sold as ’savings’ accounts, to the detriment of the consumer.

Data shows that Australians are doing the right thing by saving more ”“ but by not using the right account are doing themselves a disservice.

Don’t be fooled

Presently a genuine savings account should be offering around 6 per cent interest, and if it isn’t you should be asking why?

Another sign of a genuine savings account is that you shouldn’t in most cases be able to access your money via an ATM; however they can be linked to an everyday transaction account which allows you to easily transfer money between accounts when you want to access it.

Obviously easy access to money is important to many people. Consider then having your salary paid directly into your high interest savings account, where it will grow from the interest, and then transfer the amount you need to cover your everyday transactions and bills into your linked account so you can get your hands on it quickly if need be.

By keeping the bulk of the money in a HISA, you earn more interest. It’s that simple.

For those who are less in need of liquidity, or access to their savings, it might be worthwhile also considering investing in a term deposit.

A fixed income investment, term deposits continue to offer above average returns as investors remain cautious about volatile equity markets. The fact that money cannot be accessed at will (if you do need to access the money before you reach the agreed term you will have to pay a penalty) means it is not necessary appropriate for everyone.

However, the beauty of a term deposit is that it provides a guaranteed return as well as great rates. And because you can opt to take your interest monthly, quarterly or half yearly, locking your funds away on a secure five year term still allows you access to the interest. This is especially beneficial for retirees who are in the capital preservation stage.

There are a number  of savvy strategies that can be applied to term deposits which can also help you make the most of the best interest rates on offer (again, allowing you to tap into some of that ‘free money’).

The first is called ‘laddering’, which refers to when you invest in a range of term deposits that mature at different times. This means you not only have a continual source of funds, but you also have the opportunity to reinvest at different times, so you essentially ‘smooth out’ the rises and falls in interest rates.

The second strategy is known as a ‘bullet’ strategy. This is when term deposits are purchased at different intervals but with a common maturity date.  Those who are saving for a particular purpose, or who can afford to lock away a sum of money, can benefit from guaranteed high returns. This is a popular investment course.

Whatever product you currently use or choose, it’s important to look closely at what is on offer in the market and be sure you are getting the best for your savings. And this ultimately means a product that offers high interest and no fees.