With interest rates currently at record lows around the world I have a few tips to help you squeeze the most out of your savings accounts. What do you do with your emergency fund or savings for short term financial goals such as holidays, vehicles or toys? You want to get some return but cant afford to risk your capital in the markets. The answer is good ole savings accounts.
Unfortunately transaction accounts or checking accounts generally offer next to zero interest. There are some exceptions to this namely accounts suited to students and pensioners. The best thing you can do with a transaction account is ensure you select one with no monthly or transaction fees. If you you are making an ATM withdrawal pay close attention to the fees. Banks can charge in excess of $5 for withdrawing funds from another banks ATM. It is also best to avoid accounts with an overdraft facility (ability to draw into the negative) because we all know how tempting it is to use it when its there.
Online Savings Accounts
Online savings accounts are generally fee free and offer some of the highest interest rates available. OSA’s have high interest and low fees because they lack features regular savings accounts offer such as: ATM withdrawals, bpay, online transfers and physical branches. Be aware that some online savings accounts need to be attached to a transaction account at the same institution. In that case pay attention to the transaction accounts terms.
Fixed Term Deposits
Fixed term deposits or Certificate of deposits offer similar rates to online savings accounts. Rates are dependant on the term and current market trends. Terms start from 90 days to about 5 years. There is generally no fees unless you require access to the money early. In that case you will usually forfeit all interest and possibly incur additional charges.
Introductory rates / bonuses
Savings accounts and online savings accounts can often have introductory rates and bonuses like the following:
- An additional 1.05% interest for the first 6 months for new customers.
- Bonus 2% interest if you deposit $500 per month and make no withdrawals.
- Extra 0.5% interest if you also open a transaction account with us.
- No account fees if you deposit a minimum of $2000 per month.
- Overdraft facility.
- And the list goes on!
Pay special attention to these deals and only use them if they fit in well with how you plan to use the account. A lot of the offers are setup to entice you to open an account. In the long run it may cost you more in fees if you fail to meet the criteria.
A strategy that I have used is to take advantage of the bonus introductory interest rates. As soon as the rate drops back to regular I would move the funds to another bank with a good introductory rate. Rinse and repeat!
When it comes to short term (less than 5 years) investing the above accounts are very low risk and government backed (insured). Any alternate investments with higher yields will inherently have a higher risk. An example of an alternate investment would be purchasing a index fund or ETF that is entirely or has a very high concentration of high quality bonds.
Now that you know a little bit about the products offered by banks you need an easy way to compare them. In order to squeeze the most out of your savings accounts I would recommend using a comparison site such as Infochoice, Mozo or Ratecity.
Shop around for the best rates and lowest fees you can get on the products that you require. Link an online savings account to your transaction account and move your money that is siting idle. Automate your savings by using scheduled transfers. Take advantage of bonuses but be aware of the traps. I wish you all the best on reaching your savings goals! Let me know how you put your short term capital to work? Or contact me if you have any questions.