Choosing a Bank Account - Part 1
Shortly after we got married, my wife and I sat down to organise our finances and get joint bank accounts. This is part one of a short series explaining some of the things we looked at and how we came to our decisions. In part one we'll look at the definitions and basic types of accounts that are available, and how they can best work for you.
A Transaction Account is the account you use to make purchases. Your money is available when you need it, either by making a withdrawal at a branch or ATM, or by making a purchase with a Debit Card attached to the account.
We decided that we didn't want a Credit Card, so we looked for an account where we could both get a Debit Card attached, without any additional fees. We were initially expecting a VISA Debit Card, but we ended up with a MasterCard Debit Card. I don't think there is any practical difference.
Transaction account generally have 0% or very low interest rates attached. If possible, it is not a good idea to keep large sums of money in a transaction account, because it doesn't earn any interest. That money is also at greater risk, should your Debit Card details be stolen.
When we got married, most transaction accounts had a small ($3-$5) monthly fee. These fees are less common now, or will be waived if certain criteria are met (eg, depositing over $2000 in the month). While these fees are not large, and the waiver criteria may not be difficult to fulfill, having an account with $0 fees makes life a lot easier.
As its name implies, a savings account it meant to store your savings. The money in these accounts can generally not be spent directly, but must be transferred to a transaction account before it can be accessed. The restrictions on these accounts to vary from bank to bank, though. Some require a transaction account to be 'linked' to the savings account, and money can only be transferred in or out through that linked account. Others are less restrictive, allowing transfers to any of your accounts, or even allowing BPay or Pay Anyone transactions directly from the savings account.
A savings account should have a high interest rate. These rates can vary from 3% or lower, to over 5%. Obviously higher is better, but there are often conditions to watch out for. Many savings accounts come with an 'introductory bonus rate' where the advertised rate includes a bonus that is only valid for the first few months, before reverting to a lower, standard rate. These introductory rates are good, but make sure you find out what the standard rate is, and base your decision on that.
Other savings accounts have conditions imposed for gaining a higher interest rate. This can include automatic savings plans, minimum deposits or limits on the number of withdrawals. Such limitations can be a hassle, depending on your situation. Be sure that you can meet these requirements, and make sure you know what the standard rate is, in case you can't meet the requirements some months.
The interest rates on these accounts are also variable. The bank can vary them at any time with very little warning, based on whatever criteria it sees fit. This is important to remember, as today's best rate may not be tomorrow's best.
Also note that some savings accounts have a cap on how much money you can earn interest on. This is something to be aware of if you have high savings goals. Hopefully this affects you more than it affects me :)
Savings accounts generally don't have any account keeping fees. There may be fees for special transactions or being over-drawn. These accounts are also often 'online only', and may have fees attached if you need someone at a branch to assist you.
A term deposit is a special kind of savings account with some additional restrictions, and also potentially greater benefits, together with a small element of risk. A term deposit allows you to put away your money at a certain fixed interest rate for a pre-determined period of time. The rate will not be cut the next time the RBA cuts rates, but it will also not increase should there be a rate rise. This is where the risk comes in - sometimes if rates go up, you would be better off with your money in a savings account. With a term deposit, you know exactly how much money you will get out of it at the end.
The main restriction is that your money is locked away for the pre-determined period of time. This means it is not available in case of emergency or sudden expense. For this reason, term deposits are used when you have some spare savings that you know you will not need over the next period of time.
Should an emergency arise, you will be able to get your money out, but it will either be at a severely reduced interest rate, or maybe even no interest. Partial withdrawals are also generally not allowed in this case.
When looking at term deposits, you ideally want to beat the savings account interest rate, keeping in mind that that rate could change. Different rates apply to different term lengths. With terms ranging from just a few months to 5 years or longer, the sweet spot in rates is often around 6 months. Some banks will also offer a 'bonus rate' for keeping the whole amount in a new term deposit at the end of your first term. This is called 'rolling over'. Be sure to check the base rate though - although the rate was fixed for your initial term deposit, it may have changed for your roll over.
Different types of bank accounts have different purposes, strengths and weaknesses. In this part we've looked at what some of those characteristics are. Next time, we'll look at how you can arrange your finances to best take advantage of them.
**UPDATE** Part 2 is now available, looking at how we organised our money into different accounts.