If you’re relying on savings to earn money, you always need to factor inflation into your expectations. Inflation can be described as the increase in prices of goods and services over time, so if the interest you are earning on your savings account is lower than inflation, the buying power of the money that you put into your savings account is in fact diminishing.
For your savings account to provide you with a benefit in real terms (adjusted for inflation), it needs to return interest (after tax) at an annual rate that is greater than annual inflation. As interest earned in savings accounts is treated as income, you will need to pay income tax on any interest that your account earns at your marginal tax rate, which can eat away at your potential interest earnings by as much as 45%.
The graph above shows historical inflation rates in Australia all the way back to 1977. According to the Reserve Bank of Australia (RBA), the current annual inflation rate as of Q2 2017 is 1.9%. This means you need to look for a savings account that offers a higher interest rate than this if you want your money to appreciate in value over time.
How to offset inflation with your savings account
As of the 20th of September, the average base interest rate on savings accounts (considered in Canstar’s Savings and Transaction Account Star Ratings) is 1.35%, based on a balance of $25,000. Only 13 online savers at this time have a base rate equal to or greater than the rate of inflation.
But there is a silver lining.
There are currently 60 accounts that offer a conditional bonus rate, which allows you to earn additional interest if you meet certain requirements. These conditions range from making a contactless payment on a linked transaction account each week to making an extra deposit into the savings account each month.
In the past month, 83% of visitors to Canstar’s site have looked for products that come with a bonus interest rate, so it appears that customers are catching on to this incentive.
The average total rate (which is the base rate + the conditional rate) for savings accounts with this option is 2.22%, with 3.00% the highest available. These conditional bonus rates can be significant, and markedly higher than the base rate.
If you are eligible, here are some of the steps you can take to receive the conditional bonus rate on your account:
- Meeting a minimum deposit amount each month. Some accounts require contributions of at least $2,000, others as little as $50.
- Making weekly tap and go payments with a linked Everyday Transaction Account.
- Making no withdrawals from your savings account in a month.
- Making a minimum number of deposits, regardless of the monetary amount
There are plenty of savings accounts available that have high bonus rates, and you can find them by comparing your options with Canstar:
Rates on 5-Star savings accounts
As mentioned, the average base rate on savings accounts across the whole of the market is 1.35%, while the 60 accounts with a bonus rate have a total interest rate of 2.22% at the time of writing.
When looking solely at Canstar’s 5-Star rated savings accounts considered in this year’s Savings Award, this average total rate increases to 2.75% – more than 0.50% of a difference. Below is the complete list of 5-Star savings accounts:
Please note that this table is sorted by provider name (alphabetically) and is based on a regular saver in NSW with $1,000 in current savings:
The savings levels of Australians are at their lowest point since the early 2000s. It doesn’t help that savings account rates are generally lower now than they have previously been, but that doesn’t mean you shouldn’t consider a savings account as a way to build your savings.
Savings accounts offering bonus rates conditional on meeting minimum deposit requirements can encourage regular savings habits, because they motivate you to save in order to receive the bonus interest each month.
How to choose a good savings account
- A high interest-rate
- Low fees on the account (monthly account fees, deposit fees etc.)
- Ways that you interact with the account (e.g. Online banking platform, smart ATM’s and Branch network)
- The number of free transactions and rebates
- Other useful features offered by the institution, such as free calculators and budget trackers
While important, having a good interest rate on your savings account won’t always be enough in isolation. It is always wise to look at each product as a whole to make sure it provides you with great value for your circumstances.
You can compare the options available to you with Canstar: