High-interest savings accounts

What is a high-interest savings account?

A high-interest savings account (also known as a savings account or online savings account) is one that offers a competitive interest rate. It is similar to a bank account, but it is designed to help you save rather than spend money. Typically, interest is compound interest that is calculated daily and paid monthly. All savings accounts come with a free 24/7 online banking platform to access your funds.

What are the benefits of a high-interest savings account?

• You don’t need to know anything about finance.

Compared to other investments, such as shares and property, a savings account is probably the easiest one to apply for. You can always reinvest what you deposit into another asset and it’s almost impossible to achieve a negative return on a savings account.

• You don’t need to take any risks.

It’s considered one of the safest investments in the financial system (next to a term deposit).

• You’re buying time to learn.

It’s a stepping stone for learning how to invest in shares and other investments – you can leave the money there until you’re comfortable enough to understand how other assets work.

• You can see results fairly quickly.

You can see progress after just a few months by quickly earning a few dollars.

How do high-interest savings accounts work?

You generally link a high-interest savings account to your bank account, which allows for the easy transfer of funds back and forth. In some cases, you can only link your savings account to another account within the same bank. A savings account also gives you at-call access to your funds, which means you can access your money almost immediately.

The interest rate is calculated on your balance every day and your interest is paid monthly. The following is the formula your bank usually uses to calculate your daily interest: Daily balance x interest rate (as a %), divided by 365.

How do I always get the highest interest rate?

Many high-interest savings accounts offer bonus introductory rates for the first few months only. For example, an account may offer a higher interest rate of say 3.00% for the first 3 months, which then drops down to the standard variable interest rate after this time, and this could be much lower.

To ensure you are always earning the highest rate, you could continually switch savings accounts after the introductory period ends. However, bear in mind that you can typically only earn the bonus introductory interest on your first account with that bank.

How do I find the best high-interest savings account for me?

• Look for: High and competitive interest rates

Make sure you know the difference between the standard rate and any introductory rate that the bank may be offering. Also, pay attention to the conditions required to earn bonus interest. The offer may only apply to new customers or you may need to meet deposit and withdrawal conditions.

• Look for: Online flexibility with 24/7 access

If you’re trying to stop yourself from dipping into your savings, then consider an account with limited or no accessibility. Term deposits offer you a higher rate of interest the longer you agree to keep your money inside. The catch is that you won’t have access to your savings for the duration of the term unless you want to pay a hefty penalty.

• Consider: Going online

Kiwis who are willing to manage their savings entirely online could benefit from an online high-interest savings account. Since these accounts require less overhead costs, customers are rewarded with a higher rate of interest.

• Look for: Whether you can link your existing bank account or need to open another account.

Some high-interest savings accounts need to be linked to a transaction account. Banks dictate whether the account needs to be from the same institution or if it can be from a different bank. If you already have a transaction account at a different bank, check to see if you can link it to your high-interest savings account. Otherwise, you may be forced to pay another monthly fee for a bank account you don’t need.

• Look for: Zero fees

Check for any fees charged for maintaining the account. It’s common for savings accounts to not have monthly fees.

• Identify: Whether you’re a regular saver or flexible saver

If you’re a regular saver, consider opening a bonus saver account. This way, you receive a maximum amount of interest every month. Flexible savers may want to opt for an introductory bonus account so they get the bonus interest rate no matter how many withdrawals they make.

Example: Should I switch savings accounts?

This table shows the interest that is calculated daily and paid monthly. It doesn’t take into account any other deposits made into your account; if you make additional deposits, you accumulate more interest in the long term.

Not only can you earn money by switching to a high-interest savings account, but you can also save money. If you have money sitting in a low-interest everyday transaction account that has banking and transaction fees, it could be you are actually losing money.

With so many different high-interest savings accounts available online, it’s straightforward to take advantage of one. The more you deposit into a high-interest savings account, the more interest you earn on those deposits over the long term.

* This is a fictional, but realistic, example.

What types of high-interest savings account are available?

There are different types of accounts depending on their purpose.

If you’re self-employed or a business owner, you may be better off with a business account

Business savings accounts mean that you can separate your work and personal expenses, so it’s easier to collate them at tax time. Also, most banks charge a fee for depositing cheques. If you still deposit a lot of cheques with small amounts, you may want to consider switching to electronic payments as they tend to be free.

If you share finances, a joint account may be easier

Joint savings accounts mean that 2 signatures are required to make withdrawals, which can help partners and couples reach a savings goal together.

If you want to teach your children good money habits, you can set up a children’s savings account

Most banks offer competitive deals for children’s accounts, including bonus interest rates for regular deposits and no withdrawals, plus no account-keeping fee. Online accounts tend to pay a higher interest rate and charge fewer fees, catering to pocket-money savers gradually growing their balance over time.

The advantages and disadvantages of a savings account

What’s the difference between a savings account and a term deposit?

High-interest savings accounts offer competitive rates, but conditions apply in most cases. For example, you might need to deposit a specific amount every month and not make any withdrawals. Introductory bonuses also only last a few months.

Term deposits offer good interest rates over a fixed term of between 7 days and 12 months. There is usually a minimum deposit required and although term deposits can be broken, a hefty penalty usually applies.

Traps to avoid when using your high-interest savings account

It’s essential that you choose the high-interest savings account that best serves your needs, which can help avoid the following scenarios:

Interest rate penalties apply if you don’t meet the terms and conditions.

• With term deposits, it’s important to choose the right term duration. If you choose a term that is too long and find yourself needing the money sooner, you have to pay a penalty to have your term deposit released early.

Variable interest rates could mean that you lose out when the cash rate decreases.

• Banks can lower their rates in response to many factors. Bonus introductory rates are generally withdrawn after a few months, or at the end of the introductory period. If the rate on your account has changed and you’re not sure why, contact your bank.

How do I apply for a high-interest savings account?

Can I open a high-interest savings account as a tourist in New Zealand?

Depending on your visa type, you may be able to open a bank account in New Zealand. You should always compare different migration programs offered by certain lenders. Speak with the financial institution directly about eligibility requirements for opening an account as a temporary visitor.