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Investing
Top places to stash your cash
Toni Case - March 5, 2008
For many years now it has been a much more lucrative strategy to borrow money than to save money. While early this century just 5.5 per cent was charged on the standard mortgage, anyone with savings languishing in bank accounts received a measly 4 per cent. At these rates it made plain common sense to borrow – and invest the funds in higher-returning shares or property - rather than stashing funds away in cash. Well, those days are fast disappearing.
Yesterday the Reserve Bank upped the cash rate to 7.25 per cent, which spills into the rates borrowers pay on their mortgages and personal loans, as well as the rates savers receive on their cash. So while borrowers struggle with mortgage rates of over 9 per cent, or personal loans pushing the 13 per cent mark, savers are bathing in the luxury of receiving as much as 8 per cent on their cash – and yes we’re talking risk free.
Knowing that investors get hot and bothered over guaranteed, risk free returns, financial institutions have turned to selling term deposits and high-interest savings accounts as their new bread and butter. Competition is intense, which is good news for hearty savers.
Over the past few years a raft of foreign bank and non-bank competitors have upped the ante on what’s available for the cashed-up. On last count, there were more than 70 online savings accounts in Australia.
ING Direct was the first to offer Australian savers a decent return on their cash back in 2002, when it launched Australia’s first Internet-only savings account, the Savings Maximiser. Without branches, ING Direct customers access funds via phone or online only – transferring savings to a transaction account before making withdrawals from ETPOS, ATMs or at a branch. Today, ING Direct is joined by the likes of RaboPlus, BankWest, HSBC as well as local banks Westpac, NAB and St George who also offer high-interest savings accounts.
The table below shows some of the top online savings accounts on offer today. The problem with placing accounts side-by-side and comparing is that no two accounts are alike. As you can see, although the BankWest TeleNet Saver offers a generous 7.50% on cash, the rate only applies to the first 12 months before reverting back to a base rate of 7%. The HSBC 7.2% offer, paid monthly, is only applicable if you make no withdrawals within the month, and the St George directsaver rate only applies until 30 June this year. The RaboPlus offering doesn’t have any conditions attached.
High-Interest Online Savings Accounts
| Institution |
Account |
Interest rate |
Interest paid |
Conditions |
| BankWest |
TeleNet Saver |
7.50% |
Monthly |
Rate only applies for the first 12 months and then reverts to a base rate of 7%. |
| HSBC |
HSBC Serious Saver |
7.25% |
Monthly |
Interest only accrued if no withdrawals are made within the month. |
| St George |
directsaver |
7.25% |
Monthly |
Rate applies until 30 June 2008, and then reverts to the standard variable rate. |
| RaboPlus |
RaboPlus Savings Account |
7.15% |
Monthly |
Applicable for personal, trusts, businesses and self managed super funds. |
Different savings accounts on offer
If you have excess money that you’d like park in cash – perhaps you intend to wait until the sharemarket volatility subsides, or you’re saving up for a new car or holiday – then you need to know the difference between say a cash management account and a cash management trust, or a transaction account and an online savings account. Indeed, there are differences to be aware of that will impact how easily your funds can be accessed, the interest you receive, fees and so on.
Below is a brief rundown of the different cash products on the market.
Term Deposits
Just as the name suggests, term deposits tie up your funds for a term, or period of time, whether its 30 days, 90 days or two years. If you need to pull your money out for an emergency, they’ll clog you with a break fee. So term deposits are solely intended for funds that you don’t need for a set period of time. The interest rate you receive is fixed for the term, so if the RBA decides to drop rates during the term then it won’t affect the rate you receive.
Contrary to what you may believe, a longer term doesn’t necessarily translate into a higher interest rate. A term deposit may offer a tiered rate – the longer the term, the higher the interest rate – to 1 year but then the rate offered declines. Interest is mainly paid at maturity.
Term deposits are up there with the best returns you’ll make on your cash. Below are the top five term deposits over a 1-year period.
Top Term Deposits – 1-year
| Institution |
Interest rate |
Interest paid |
| ING Direct |
8.10% |
Annually |
| RaboPlus |
8.10% |
Annually |
| ANZ |
7.90% |
Annually |
| Commonwealth Bank |
7.87% |
Monthly |
Internet (Online) Savings Accounts
Before the Internet, term deposits were the bees knee's of cash. However, these days your top-earning online savings accounts can match the best returns offered on term deposits. So if don’t mind using the Internet to do your banking, then online savings accounts are an attractive option since they allow almost ready access to your cash, are usually free from bank fees, usually have no minimum balance and offer extremely attractive rates.
The biggest downside of online savings accounts is that you still need a transaction account from which to move your money in and out. That’s because online savings accounts generally don’t offer branch, ATM or EFTPOS access. Rather, to withdraw and deposit funds, you transfer the funds between a transaction account and your online savings account via telephone or Internet banking. The process can take up to two days if your online savings account and transaction account are with different financial institutions. Clearly, it’s instantaneous if you organise both accounts with the one institution.
For the spend-hearty having this extra step between your account balance and purchases can come in handy. For those who don’t plan in advance and can find themselves low on cash, an online savings account mightn’t be a good option (unless it’s connected to your transaction account at the same institution, often called “all in one accounts”).
Transaction Accounts
Transaction accounts are for doing just that, making transactions – whether that’s to pay off your credit card, buy the weekly groceries or pay for the trip to the dentist. It’s important to remember that transaction accounts are not savings accounts and aren’t the place to stash your cash for the long haul.
For this reason, the interest rates on transaction accounts are almost non-existent – offering around 0.01% per annum on your balance. So when choosing a transaction account, the interest rate is hardly the selling point so don’t get hung up on it.
Accessibility is clearly important. Can you access your money via the internet, phone, ATM, EFTPOS, BPAY and so on? Ensure that you can access your funds via your preferred channels.
But the most important feature when comparing transaction accounts is the cost. Some institutions charge a standard monthly fee that includes unlimited transactions, while others will waive the monthly fee, but charge on a per-transaction basis. So depending upon your spending habits, you should choose a card that suits you.
Most of us make many more transactions each month than we actually realise. Transaction accounts that offer unlimited transactions per month are probably the preferred option for most.
Lastly, most institutions charge you for withdrawing money from other bank or non-bank ATMs. These charges vary between institutions so it’s worth checking out and comparing.
Cash Management Accounts
If the idea of having one account for transactions and another account for your savings sounds all too much, then a cash management account is an option since they are designed for both transactions and savings.
Cash management accounts offer ready access to your funds via ATM, ETPOS, phone, Internet, branch and BPAY, but also offer rates as high as around 7% for larger balances. Your ordinary cash management account probably won’t match the highest returns from an online savings account or term deposit, however, but for large balances it won’t be far off the mark. Most cash management accounts require an initial deposit of $1,000, $5,000 or $10,000, and interest paid on savings is usually tiered, increasing significantly for bigger balances.
Cash Management Trusts
Cash management trusts are like managed funds in that your money is pooled with others and invested on the short-term money market. The rates you receive are variable, and fluctuate daily according to the underlying market.
Financial advisers tend to offer cash management trusts in concert with other managed funds within an overall portfolio, using the cash management trust for liquidity purposes.
The rates you receive aren’t likely to knock your socks off and the minimum deposits are usually $5,000. Rates received on most term deposits or online savings accounts will normally be higher than a cash management trust.
This is an extract from an article that will appear on CompareMoney.com.au – the soon-to-be launched money site for beginner investors, homeowners and the money-conscious.
More articles from this edition of CompareShares:
Rate rise: When and where will the rate hikes stop
Resident Trader: The greater fool theory of trading shares
Stocks: Good conditions for Newcrest Mining bodes well for its share price
Investing: Top places to stash your cash
Forex: Fundamental reasons for a record high Aussie dollar against the greenback
Expert Panel (CFDs): Capitalising on price movements in reporting season
Housing: A dozen reasons for housing stress
Rate rise: RBA on inflation 'red alert'
Whatever your views, you can discuss this article - or any of Toni's articles - on our message board Your 2 Cents.
Toni Case is the editor of CompareShares.com.au and is Australia’s first journalist to specialise on Contracts for Difference (CFDs). She was a staff writer for Shares, Personal Investor and Asset Magazines, and today is a regular columnist with the Australian Financial Review. She is a qualified financial adviser, and has an Economics (Honours) degree from Sydney University.
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