With so many savings accounts available it’s often difficult to know which one to choose to get the best return on your investment. And as they all offer varying degrees of flexibility, as well as varying degrees of interest, it’s important to know what to look out for when choosing where to invest your money.
Below is a list of what to watch out for when looking for a savings account.
INSTANT ACCESS OR NOTICE ACCOUNTS
Before choosing a savings account you should have a clear idea your savings goal, that is, what are you saving for and a rough idea of how long will it take you to meet that savings goal. And with this you will need to decide whether you will require regular access to your funds or whether you can afford to have the money ‘locked in’ over a period of time.
If you are saving for an emergency fund or simply feel that you may need to have access to your funds at any given time, then you will most likely be better off saving in an easy or instant access savings accounts. With such an account you have constant access to your money and can draw on it at any time without incurring a penalty fee. The downside is that this convenience is usually offset by a less attractive interest rate.
If you have a longer term savings goal and are confident that you will not have to break into your funds early then you may be better off putting your money into what is known as a notice account.
These are simply savings accounts that require you to give the bank notice of your intentions to withdraw money. For example, if you have a 90-day notice account then you would have to notify the bank 90 days in advance before you could withdraw money without being charged a penalty fee.
Although this is inconvenient, notice accounts traditionally have a better interest rate than instant access accounts.
Some banks will offer an introductory rate that will give you a preferable rate for a set period of time as an incentive to save with them. Since base rates have dropped to all time low levels these types of introductory offer are now more attractive than in the past as guarantee a minimum rate of return on your investment.
It is important to take note of how long the introductory offer is and whether you can easily move your cash without a penalty charge being imposed once the special rate has ended as you may lose out in the long run if this is not the case.
Some banks will limit the amount of withdrawals you can make in one year and impose penalties for going above this limit.
Other accounts may have restrictions that will limit any interest paid during a month that a withdrawal is made. For instance, the terms may state that if you withdraw money from your savings account then no interest will be paid on money that remains in the account.
This can prove costly if you lose out on interest on thousands of dollars for the sake of a withdrawal of a couple of hundred dollars.
When there is money to be made then the tax man is never far away and so it’s important to check what the after tax interest rates are on a savings account, particularly as rates are usually quoted without tax to make them appear more preferable.
The general rule of thumb is that basic rate taxpayers will pay 20 per cent on any interest earned, higher rate taxpayers pay 40 per cent and top rate tax payers lose 50 per cent of their interest.
So, as you can see, saving money is not quite as straightforward as you might think and it always makes sense to check the terms of an account to make sure you receive the best return on your investment.
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