Australia has seen interest rates increase over the last year which, whilst being bad news for borrowers, means a boon for savers. As the Reserve Bank of Australia (RBA) has adjusted rates ever higher now the right savings account can make a big difference on the interest you can earn. At the moment, the difference between the highest paying online savings account in the market, the BankWest Telenet Direct and your everyday run of the mill transaction account is a massive 6.60%! On a balance of $25'000, the amount of interest that could be earnt would amount to $1,700.00!!

Once you have the rates issue sorted out, the next thing to look at is accessibility. Generally, online savings accounts, whilst offering the highest interest rates, don't provide you with the same access options that a more traditional savings account would. As a result, you need to weigh up your preference for greater access as opposed to more interest.

For the determined saver, the access issue probably isn't a problem as these accounts can help you keep away from spur of the moment purchases. However if you require immediate access to your funds, then a day to day account with an attached sub-account is probably a better idea.

 

 

 

Sometimes you will see an account quoted with a nominal and effective interest rate. The difference between these two is that the effective rate takes into account the payment terms of the interest and factors this into its calculation in order to determine the "true" rate of interest earnt.

Take an account that pays interest annually. A $10'000 investment in an account paying 5% will earn $500 interest ($10'000 x 5% x 1 year). As a result of this, the accounts nominal and effective rates are the same, due to the fact that the investors balance does not improve as a result of interest payments.

An account that pays interest monthly (As a majority do in Australia) will be a different story. Take the same example above, but instead of interest being paid annually, make it monthly. This is known as compounding interest and will increase the effective rate of the account. Just by having the interest paid monthly, the total interest earnt over a year increases by $11.00. Now this may not seem like much, but over time the compounding effect will only make it get bigger and bigger. See how compound interest will affect your savings by using our calculator here 

 

How the banks calculate interest rates

The interest rates that institutions offer on your savings accounts are influenced by a number of various different factors. The Reserve Bank of Australia (RBA), who are in charge of Australia's Fiscal Policy set the official cash rate which directly affects the cost of funds for institutions which as a results determines what they will charge/pay you for yours. The RBA meets once a month to discuss the issues that affect the Australian economy and make their decision, announcing it on the first Wednesday of each month.

The RBA cash rate is raised during the growth stage of the economic cycle. The purpose of this is to raise the cost of funds in an attempt to keep growth sustainable. If the growth that is occurring is un-sustainable then it places Australia at the risk of increasing inflation. Inflation has the effect of decreasing the value of money because it is a situation where there is too much money chasing too few assets.

During a downturn in the economic cycle, the RBA will lower rates in an attempt to find a level that encourages business to access cheaper funds to encourage growth. This also helps to stop our economy from slipping into a recession which is defined as two consecutive quarters of negative growth.

From this it can be seen that what is good for a saver is bad for a borrower. If rates are high, you will earn a good return on money in the bank, however, if you need to borrow you will be paying a lot more. On the flip site, if rates are low, your savings won't earn much at all but borrowing costs decrease immensely.

  

 

Australia has an astounding array of financial institutions: Banks, Credit Unions, Building Societies and Online institutions. And this isn't the end of them. There are many other types of institutions however they are not concerned with personal deposits.  

The main difference between Banks and Credit Unions/Building Societies is that Banks exist to make profit for their shareholders, whereas a Credit Unions/Building Societies goal is to deliver 'value' to their customers in the form of better rates and lower fees.

This generally is the case however what is often the case is that different institutions will deliver different products to meet differing needs in the market. Banks are becoming more competitive in various sectors (Online Saving accounts for example)