How do I choose the best saving solution?

Saving can be a challenging habit to establish and your discipline can easily be over ridden by emotional impulses. The easy and logical answer to the question of the best savings account is to choose the one that will pay the highest interest rate. However the various different accounts require different behaviours to achieve higher rates of interest and these behaviours may be motivating or demotivation to your savings habit depending on your personality.

How to choose the right saving solution:

  •  The best option for you is the one that will motivate you to save the most
  • Accounts that pay higher interest rates with low fees are attractive
  •  It should be easy to put money in but only give you access when you need it

Online saving accounts offer great flexibility as you can easily move money in and out using internet banking or an app, your money is “at call”. You will also benefit from compounding as interest is
paid into the account. You can easily set up a regular contribution to on online account to intentionally save unintentionally. The major downside from a saving psychology perspective is that your money
is easily accessible and there is no cost or penalty for making withdrawals.

Reward saver accounts can be helpful to use if you deposit say over $10 regularly like once a month and do not make any withdrawals, through this solution you get a bonus amount of interest which
makes this solution slightly better for regular savers than online savers. Note, if you withdraw money from this account, you do not earn interest for that period (e.g. that month). These accounts tap strongly into the savings psyche. The downside of these accounts is that the base interest rate is low and if you need to make any withdrawals you will only be paid that rate for the
month so you want to be confident that money you put in will not be required.

Term Deposits can have sometimes pay interest rates that are higher than online savings accounts or reward saver accounts (even with the bonus interest) and can help to achieve a higher return. The
downsides of a term deposit is that they do require some effort when the term ends as you will need to either reinvest into another term deposit or put the money into another account. When you start a
term deposit the money is effectively locked away for that term (for example three or six months) and there are significant fees if you need to “break” the term deposit. This can be good from a savings
perspective as it helps to lock money away and remove the temptation to spend it.

Offset Accounts are a wonderful Australian invention that can help you save whilst you have a home loan. This is an account linked to your home loan. The money in the account is ‘offset’ daily against
your home loan balance and as a result, the interest you pay is the difference between the home loan balance and the offset. Only some home loans offer offsets and need to check they are 100% offset
and apply for the duration of the loan (vs. only a specified time). Some banks also offer multiple offsets accounts against the one home loan which can help with saving towards multiple goals.For
example, if you have a $500k loan with $100k in a 100% offset account and have paid off $150k, you only pay interest on the balance less the offset i.e. $250k

Micro-investment account gives you access to an exchange traded fund (ETF) in line with your risk profile and allows you to deposit an amount of your choosing into it each week. Currently they charge
a fee of 0.275% on the investment balance subject or $1.25 per month (whichever is greater). Companies like FirstStep and Raiz also offer Roundups – which rounds up purchases to the nearest dollar,
putting the difference into the investment account. For example, if you buy a coffee for $3,80, it will charge $4.00 to my credit card and put the $0.20 into the investment account.

Here are some things to consider when choosing a solution (or things to ask!):

  • what are the conditions on the interest rate? (e.g. is this only for a period of time and then becomes lower?)
  •  is there minimum or maximum account balance?
  •  are there any fees? (will you be charged for the account, what are the withdraw fees etc) – ideally no!
  •  do you need to make regular deposits into the account and if so, how much? and how regularly?
  • will you lose interest if you withdraw money?
  • is a linked account required

Also, it is important to have your account with a “Authorised Deposit- taking Institution” (ADI) which are regulated by Australian Prudential Regulation Authority (APRA) which basically means the money
is safer.

Check out banking/ for even more information.
Once you have chosen the right account for you, it’s time to open it.