Can a savings account help you grow wealth?

With interest rates on savings accounts at historic lows, many Australians with savings goals are probably wondering if they can still grow wealth through them.

However, as rates continue to slide below the rate of inflation, the outlook is not too optimistic for savers at the moment.

So, can a savings account still help you to grow wealth? And if not, what other options does your bank offer to help you earn a return or make money from your savings nest egg?

How far rates have fallen

The Reserve Bank of Australia (RBA) has cut the cash rate five times since June 2019, including one emergency cut mid-March in response to the economic impacts of the COVID-19 pandemic.

The cash rate currently sits at 0.25 per cent, and RBA Governor Philip Lowe has indicated they have no intention of cutting this further any time soon. However, there’s no way of telling just how long COVID-19 will continue to affect the economy, so it’s also difficult to say when rates may rise again.

RateCity research shows that since June 2019, the average savings account rate has fallen from 2.66 per cent to 1.43 per cent for introductory savers, and 1.55 per cent to 0.66 per cent for conditional savers.

As the cash rate is an influencing factor to what interest rates bank will set to not only savings accounts, put simply, a low cash rate means a low return on your savings.

How different account types boost your savings

There are two main types of savings accounts: introductory savers and conditional savers:

• Introductory savings accounts typically offer some of the highest rates on the market, but only for a fixed period – typically a few months.
• Conditional savings accounts offer low to high interest rates that can only be earned if you meet certain conditions on the account, such as depositing a minimum amount each month or making no withdrawals.

As interest rates continue to drop, one way to try and boost your wealth with a savings account is to switch between the highest rate savings accounts. This is typically done by introductory savings account hopping, as they generally offer higher rates with no strings attached than conditional savings accounts.

There are no rules against switching between high-rate accounts at the end of each introductory period. It is just generally considered a bit of a hassle, especially if the savings account is linked to a transaction account that you’ve set direct debits to come out of.

RateCity research shows that over the last year, introductory accounts on average offer higher interest rates than conditional accounts (not including kids or pensioner accounts).

Further, when comparing the highest rates offered by introductory or conditional savings accounts over the last year, introductory accounts also offer higher rates. The exception being this month, with a conditional Westpac savings account coming out on top.

Average interest rates - introductory vs. conditional savings accounts:

Source: RateCity.com.au. Notes: based on average balance of $25k. Does not include child or pensioner accounts. Data accurate as at 22.07.2020.

Highest interest rates - introductory vs. conditional savings accounts:

Source: RateCity.com.au. Notes: based on average balance of $25k. Does not include child or pensioner accounts. Data accurate as at 22.07.2020.

Rule of inflation

As a rule of thumb, you may want to try and keep a savings rate above the rate of inflation – currently sitting at 2.2 per cent. This can mean the difference between simply parking your money in a safe account and earning real interest on it.

However, only one conditional savings account still offers interest above 2.2 per cent. Westpac’s Life savings account has a rate of 3 per cent, but only those aged 29 and under can apply.

Further, only one introductory account offers a rate above inflation. Rabo Bank High Interest Savings Account has an interest rate of 2.25 per cent for four months.

This unfortunately means that it is now extremely difficult to earn any real interest on a savings account.

What other wealth growth options are there for savers?

There are a few other ways you can try and grow your wealth, with some features potentially offered by your bank already. You may just have to switch them on.

One way banks can help you boost your savings with little effort is through everyday round-up programs. There are handy features that will ‘round up’ any spending you make to the nearest $1, $5 or $10 and deposit it directly into your savings account. ING is one example of a savings account provider who has an Everyday Round Up feature.

For example, if you bought a $3.50 coffee and had the round-up feature set to $5, it would transfer $1.50 directly into your savings. That may seem small, but if you did this every day, after a year you’d have an extra $547.50 in your savings nest egg you’d otherwise never have had.

Some transaction accounts, like Commonwealth Bank’s Smart Access, also offer a feature called a ‘sweep facility’. If you set a minimum and maximum limit on your transaction account, this feature automatically ‘sweep’ and transfer funds to and from your linked savings account.

If your bank does not offer these features, there are a range of fintech apps on the market that can not only round up your spare change into your savings account, but may also invest it for you or pay off your debt, including:

• Raiz – automatically invests your spare change into a diversified portfolio.
• Qapital – allows you to set fun rules and goals when rounding up your spare change.
• Qoins – automates extra repayments towards your debts and creates savings for you in $5 increments throughout the month.

Unprecedented times may call for unprecedented measures. If you’ve never thought about your savings account rate before, or if you’ve never thought of using fintech to boost your nest egg, now may be the time to do so.

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