Savings Accounts

How do savings accounts work?

A savings account is a type of account held at a bank or other financial institution designed to house your funds. Unlike bank or transaction accounts, though, savings accounts aren’t meant to be used for day-to-day purchases. As such, the access you’ll be granted to your savings account will generally be more restricted, with caps on the amount and frequency that you’re able to take funds out of your account.

As the primary function of a savings account is to sit largely untouched, it carries a greater capacity to generate meaningful interest on deposited funds. Interest is typically accrued on a monthly basis, which can then be withdrawn at your discretion, but what savings accounts can do is also earn interest on top of the interest you choose to leave in your account, rather than withdrawing it every few months. This system is called compound interest.

How does compound interest work and how do I calculate what I’ll earn on my savings account?

Compound interest can easily be calculated using the following formula:

Principal x (1 + (interest rate ÷ compound frequency)) ^{time period} = final balance

If you wanted to apply that to a real-life calculation to work out how much your principal would be after a certain period, you can quite easily do so. For this equation, we’ll say that the initial principal is $3,000 and the interest rate is 0.5%. The first thing to do here is divide the interest rate to determine the total monthly interest, in line with the rate at which it compounds (interest ÷ 12 = monthly interest). You then work out how many months you’re calculating interest for. For this hypothetical, you want to work out your interest after four years (48 months). The calculations will then go as follows:

$3,000 x (1 + (0.005 ÷ 12))⁴⁸ = $3,060.59

As can be seen with these calculations, you would earn a total of $60.59 over four years on a $3,000 principal in a savings account with a 0.5% interest rate. The best bank or financial institution for your savings account will likely be one which provides a high interest rate.

What are the different types of savings account?

There are a variety of savings account types available for different contexts. You may find that some will suit your situation more than others, so it’s important to survey the suite of options on offer before committing to one. Here are the major savings accounts that you should be looking out for.

High interest savings accounts

Although technically not a unique account type, high interest is a major selling point for financial institutions when it comes to their savings accounts. High interest savings accounts facilitate greater growth at a faster rate, while also bringing flexibility for the account holder to deposit funds at any stage.

Online savings accounts

As simple as they sound, online savings accounts can be a useful and effective way of managing your funds. Keeping all of your dealings in an online space, whether that’s on your financial institution’s website or via an app, will actually cut out some of the costliest expenses associated with savings accounts. One of these is avoiding bank overheads which come with physical branch locations, as banks will often charge their members a fee of around $2.50 for staff-assisted transactions.

Also, while big banks like ANZ, Commonwealth Bank, NAB and Westpac don’t have to put as much effort into walking customers through their doors, online institutions are generally more aggressive when it comes to enticing their customers. This can result in better deals like higher interest rates on their savings accounts, which benefits all parties. Online savings accounts are offered more by banks and other financial institutions without a large network of branches, with the online space serving as their primary domain. In some cases, this can lead to higher interest rates on your savings account and lower overall fees.

Bonus interest savings accounts

Also known as conditional savings accounts, these contain built-in objectives for the account holder to meet to allow them to gain access to a higher interest rate. These will generally be requirements such as maintaining a certain balance in your account over a given period, meeting monthly deposit requirements and limiting your total account withdrawals. The inherent danger with these generally is that you run the risk of being given a far lesser interest rate, or none at all, if you don’t meet these requirements.

Retirement savings accounts

If you fit into an older age demographic, you might look into a retirement savings account to house your funds and potentially generate higher interest on greater deposits. These aren’t the same as superannuation funds, but they are regulated in the same way and bring with them the same tax benefits. These accounts are quite rare today due to the prevalence of superannuation funds in society, but there are banks and financial institutions who still offer them.

Kids’ savings accounts

These accounts are designed with simple, kid-friendly mechanics that can help your child learn about money and finances at a younger age. One major benefit of children's savings accounts is that they often come with no monthly fees, although other fees may be higher, while they can also include bonus interest rates as a way of incentivising kids to save. Parents can take on an overseeing role in teaching their children about the importance of saving and tips and tricks for doing so.

Business savings accounts

These are designed to cater to the needs of business owners who want to grow their principal with handy interest. Although these rates can be lower than those of personal accounts, more growth can be achieved with greater sums of money held in the account.

Cash management accounts

A cash management account is more useful for investors who want easy access to their funds for functions such as online trading. These often come with higher interest rates than other savings accounts, which are also boosted by greater overall deposits. Minimum balance requirements may be higher in these accounts than others, though.

How should I compare different savings accounts?

Customers in the market for a savings account aren’t short on comparison points between different providers. Interest rates, fees, balance, deposit and withdrawal requirements are the most common differentiators.

Interest rates

The most accessible point to compare is the interest rate that you’ll receive on your savings. It’s important that you find an account that will earn you as much interest as possible, as seemingly small discrepancies can end up making a difference in the long term. The table below outlines how much interest you can earn with better rates over time:

Interest rate	Two years	Four years	Six years	Eight years	Ten years
0.2%	$12.02	$24.09	$36.21	$48.38	$60.60
0.4%	$24.09	$48.38	$72.86	$97.54	$122.41
0.6%	$36.21	$72.85	$109.94	$147.47	$185.46
0.8%	$48.37	$97.52	$147.46	$198.21	$249.77
1.0%	$60.58	$122.38	$185.43	$249.75	$315.37

Estimations based on a principal of $3,000. Interest rates may not be representative of current market rates

Fees

Savings accounts are likely to come with fees attached, but there can be ways around them. One of the main areas you can look to compare them is in terms of account fees, which are a relatively insignificant monthly cost but can add up to a substantial total over time that could’ve otherwise been saved and earned interest. Annual fees can also apply to savings accounts, while some may enforce fees for withdrawals or not meeting balance or deposit requirements.

Balance requirements

Most savings accounts will enforce a required minimum balance to be maintained at the end of each month and/or year. This will vary between financial institutions, so look out for an account with a minimum balance requirement that suits your financial capabilities. Maintaining the required balance consistently can open you up to accessing bonus interest rates.

Deposit requirements

Similarly to balance requirements, you’ll usually have to contend with minimum monthly deposits into your savings account. This can usually be achieved by linking your income to your savings account and have regular pay instalments deposited in there. This factor can also be a condition to be met to gain access to a bonus interest rate.

Withdrawal requirements

Your account may also have strict conditions when it comes to the amount you can withdraw, or the number of times you can withdraw, from your account each month. There are savings accounts designed specifically to prevent access in the form of withdrawals, which are generally higher-interest accounts.

Account linking

This can also impact whether you’re able to access a bonus interest rate. Some institutions will require an account to be opened under their service, namely an everyday transaction account, and linked to your savings as a condition of their increased rates. If you already have an everyday account with another institution that you don’t want to switch from, look for accounts that don’t include this requirement and charge few or no transfer fees.

The pros and cons of savings accounts​