Effective Ways To Use Bank Accounts
There are hundreds of different bank accounts out there, from all the major banks and lenders as well as the smaller credit unions and building societies.
There are also so many different types of bank accounts, from the transaction accounts which usually offer low interest rates, savings accounts which usually offer higher interest rates as well as term deposit accounts.
So which bank account do you choose? Well you don't have to choose just one, in fact it may be effective to use bank accounts is to combine the three different types of accounts to maximise the return on the money you earn and save.
Following the 3 steps below is one way to do this.
Step 1) Find The Bank Accounts
It is up to you to decide which is the right transaction account, the right savings account and the right term deposit account for you.
Some things to look for in a transaction account may be an account with no or low fees and unlimited transactions, any interest rate on these accounts will usually be negligible, so don't let this bother you too much. You can also look for an account which has great accessibility, for example online only accounts are easy to manage but may not be suitable to those who like to do their transacting in the branch.
Some things to look for in a savings account may be a high interest rate, and a bonus or incentive to save. These bonuses usually take the form of an increased interest rate on your savings if you make a certain amount of savings and minimal or no withdrawals. Be careful with these bonuses though, because if you do not qualify for the bonus rate or incentive in a particular month, the interest you will earn will drop down to a lower rate.
Some things to look for in a term deposit account may be the one with the highest interest rate. Unlike the transaction account, the interest rate is one of the most important feature of a term deposit. Your term deposit account will sit quietly and earn you interest on your money. Fees will eat away at this though so try and find one with the low fees as this combined with a good interest rate will be a good term deposit choice.
MoneyBuddy has comparison tables for all three of the different types of bank accounts on our Bank Account Comparison Page. Just remember that even though we have lots of information we don't compare every product in the market or every available features.
Step 2) Set Up Direct Debits
You can also set up a direct debit with your savings account to take out a certain amount of money from your transaction account per week. This will make sure you never forget to deposit money into your savings account, and will also force you to save, you don't have to choose to deposit money into your savings account every week, it just comes out like magic!
A good tip is to set it up to come out as soon as you get paid, this way you'll know exactly how much you have left to spend, and won't be worrying about whether you'll be saving enough or not.
Remember that most of the time the savings accounts will give bonuses if you do not make withdrawals from the savings account, so when you set the direct debit up make sure you set it at an amount which will still leave you with enough money in your transaction account. Even if you think you will be able to save more than the amount you are setting, just set the direct debit a little under your predictions and add to it freely when you can. This way you won't have to withdraw and you won't lose your bonus savings rate.
Step 3) Set Reminders For Term Deposits
Periodically you may want to take your money out of the savings account and put it in a term deposit account. It all depends on the interest rates at the time and what your financial objective are. Once you have set up your first term deposit, you will have to remind yourself to decide what to do with the money in that account when the term expires, if you are still saving, you might want to reinvest it in another term deposit.
Another thing to note is that you will have interest earnt on that term deposit account, and you might be tempted to take out the interest, spend it and just reinvest the original amount of the term deposit. This will not earn you as much interest in the long run as if you reinvest the interest earned as well. If you reinvest the term deposit with the interest added your savings will grow faster, due to the effects of compound interest. (For an explanation see our Guide To Compound Interest)