There are so many different bank accounts, savings account, and high interest accounts available that it can be confusing. Many people only focus on earning the highest interest rate possible. Is that the best strategy?This article explains the best savings account to use in your financial plan so you get the most from your money.
Let’s talk about the three main accounts available today. Everyday bank accounts, high interest accounts and offset accounts.
Everyday Bank Accounts
These are your run-of-the-mill account that you can find at any old bank. They generally don’t pay much interest at all maybe 0.01% p.a. if you’re lucky and they usually have very easy access via an ATM. Or, just tap your card or use Apple Pay/Google Pay and you have instant access, at-call access, to your bank balance. These accounts are generally best for your everyday transactions, not so much the bulk of your savings. Hold some money in there to keep your
float from day to day and pay expenses but don’t hold the majority of your savings there. Why? Because it’s not earning much money it’s not doing anything. Your money is not working for you when held in a regular bank account.
High Interest Accounts
Just that – they’re bank accounts that pay a higher interest rate. Now, when I say higher it could be 0.5% p.a. or sometimes 1.0% p.a., up to 3% p.a. depending on what interest rates are doing and what terms and conditions are attached to the account. The reason you get a higher interest rate is because banks essentially have your money for longer than an everyday bank account where you’ve got at-call access to it via an ATM for example. That could be because it’s an online-only account so it’s harder for you to access your money (no ATM access). Or, it might be because there are some terms and conditions attached like you must have your salary deposited or you must have a certain amount remain in the account each month for you to receive the higher interest rate.
As an example, in today’s current interest rate environment, let’s assume you earn 1.0% p.a. using a high interest account compared to an everyday bank account which might pay you 0.01% p.a. (nothing!), so keeping your savings in a high interest account means you earn more interest from the bank on your savings. It’s great to keep a little bit of money in your everyday bank account to keep you afloat for your daily transactions but keep the majority of your savings in a high interest account so you get a higher interest rate on your money. It’s an online-only account, that’s ok, it’s great in fact because you don’t have such easy access to it. If it’s held with a different institution to your everyday bank accounts then that’s even better because then you won’t see your savings balance all the time and therefore not tempted to spend.
These are bank accounts attached to a loan, usually a home loan, but can also be an investment loan. If you have a home loan, your bank will generally have an offset account available. It may not be automatically attached to your loan, you may need to ask them to open it for you and it may or may not have a small fee. However, regardless of the fee it can be well worth it because the money that sits in an offset account “offsets” the balance of your loan which is used to calculate interest costs.
As an example, say you have a $300,000 home loan and you have $20,000 in savings. If you keep it in an everyday bank account you won’t earn much interest at all on that $20,000. If you keep it in a high interest bank account you might earn 1.0% p.a. ($200 per year). Now that $200 will be taxable income so you will pay a little bit of tax on those earnings when you lodge your tax return. However, if you keep the $20,000 in an offset account (attached to your home loan) the entire $20,000 offsets the $300,000 loan balance meaning the net loan balance is now only $280,000. ($300,000 – $20,000).
The balance that the bank uses to calculate your interest costs is reduced by every single dollar that you have in an offset account. This means if your home loan has an interest rate of say 3.5% p.a., which is pretty common right now, and you have $20,000 in an offset account, you will essentially save about $700 per year in interest costs ($20,000 x 3.5%). That $700 is not interest income that you earn in your pocket as such, but it’s savings you make from paying less interest to the bank. Every dollar you save is a dollar in your pocket guaranteed!
Plus, it gets even better! For every dollar that you save, it’s not actually “income” so it’s not taxed! It’s risk-free tax-free guaranteed earnings on your money.
So, if you have a home loan, the best bank account for your savings is an offset account because the money you save in reduced interest costs is equivalent to your loan interest rate. That will far outweigh any money that you will ever earn in a high interest account or everyday account. There’s no negative to having an offset account. If there is a small fee, for example, one of my investment property loans has a $10 per month fee ($120 per year), it’s negligible at the end of the day because I know that the money saved in interest every year far outweighs that small fee.
Got a home loan and an investment loan, which loan is best to offset?
Always have the offset account attached to your home loan because a home loan is for somewhere that you live so you generally don’t earn income on that property and therefore the interest that you’re paying on that loan is not tax deductible, whereas, if you have an investment property with a loan attached, it will generally be for investment purposes and the property will be rented out for income and therefore the interest on that loan is tax deductible. So it’s best to have your savings offset a loan that is not tax deductible as that loan has no tax benefits and so you should minimise the interest that you paying on a home loan, before an investment loan. Keep some money in your everyday account to keep you afloat for everyday expenses and keep the majority of your savings in an offset account.
If you don’t have a home loan, the best bank account is a high interest account of your choice. There are heaps online. Select one that you are comfortable with. Don’t spend too much time searching for the best rate, just check a handful of banks and select one that offers a decent interest-rate plus terms and conditions that suit you i.e. minimum deposit requirements. At the end of the day, there are more important things to be doing with your money than holding a lot of cash anyway.
Savings Accounts & High Interest Accounts: Here’s a helpful comparison tool to get you started:
Offset Accounts: Speak to your lender or mortgage broker for more information and always check the terms and conditions.
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Disclaimer: This information provided is general in nature. It is based on the knowledge and experiences of the author and not intended to be taken as financial advice. It does not take into account the objectives, financial situation or needs of you or any other particular person. You need to consider your financial situation and needs before making any decisions based on the information. You may have to modify the information and do further research, for it to suit your personal financial situation. Therefore, before acting on the information, it is recommended that you consider its appropriateness to your circumstances or consult a financial adviser, tax advisers or legal professional to assist you in doing this