What is a high interest savings account?
In Australia, financial institutions such as banks and deposit-taking institutions (DPIs) generally offer a transaction account or savings account, and often a combination of the two.
Savings accounts are designed to earn you interest while limiting withdrawals, and, unlike a transaction account, usually don’t allow for cash withdrawals or direct spending through the account.
Here are the main differences between the savings accounts and transaction accounts:
- Higher interest rates: One of the main features of a savings account is the ability to earn interest, which is typically not present in a transaction account.
- Variable interest rates: Another aspect to a savings account is the variable interest rates, which can go up or down depending on the current market. This is unlike a term deposit, which locks in a certain interest rate for a set period of time.
- Compound interest: A common feature to high interest savings accounts, compound interest allows you to earn interest on your interest and is calculated as a percentage of the balance in your savings account.
- No account fees: The majority of savings accounts have no associated ongoing account fees, but often require a linking transaction account, which might have an account fee. You may also be charged a fee for certain transactions or if you require over-the-counter services or ATM access.
- Accessibility: Although not as accessible as a transaction account, you can technically transfer money out of your savings account at any time. This means if you suddenly require cash immediately, you’re able to access your savings. Just be mindful you may lose out on any conditional interest linked to the account for that month.
High interest savings accounts also tend to have terms and conditions that need to be met for the account to accrue higher interest than a standard savings account.
How do high interest savings accounts work?
High interest savings accounts often come with certain terms and conditions, such as limited withdrawals and a set amount deposited into the account each month, in order for your savings to accrue the higher interest rate.
These terms and conditions are often put in place to encourage you to regularly deposit into your savings account and withdraw less, which typically results in more interest being earned.
Another common feature to a high interest savings account is the opportunity to earn compound interest. Compound interest basically allows you to earn interest on your interest and is calculated as a percentage of the balance in your savings account.
In other words, you’re able to earn interest on whatever the current balance is in your savings account, even if part of that balance comes from the interest previously paid by the institution.
To give you a better picture, here’s an example of the kind of interest you could potentially earn on a savings account with compound interest.
The table below shows the accumulated interest earned for a $10,000 deposit into a savings account with compound interest at 1% per annum that’s paid monthly.
Compound interest over time on a $10,000 deposit
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| Years | Balance | Interest earned |
|---|---|---|
| 1 | $10,463 | $463 |
| 2 | $10,946 | $946 |
| 5 | $12,537 | $2,537 |
| 10 | $15,717 | $5,717 |
| 25 | $30,968 | $20,968 |
Source: www.canstar.com.au – 10/11/2023. Based on top 6 bonus savings accounts by highest rate on Canstar’s database, available for a deposit amount of $10,000. Age-restricted accounts are excluded. Interest calculated based on a $10,000 starting balance, interest rate of 4.53% – interest calculated daily and paid monthly.
What are the benefits of a high interest savings account?
The obvious main benefit of a high interest savings account is the high interest you’ll earn, and it’s one of the easiest and least risky ways to grow any money you may have stored away.
On top of that, it’s also flexible, so you’re able to deposit or withdraw your savings at any time.
To maintain your high interest savings, you could also automate your savings by setting up a recurring payment transfer between your transaction and savings accounts.
Unlike a term deposit, the flexibility of a high interest savings account may mean it’s easier to budget and manage emergency funds while still being able to accrue interest from your savings.
But keep in mind, some savings accounts only have high bonus interest rates, so if you do end up withdrawing from your savings, it may mean you lose out on the high interest earnings for that month, depending on your account’s terms and conditions.
Even so, you can always try to meet the requirements the next month.
