Five practical tips to make sure that your Savings Accounts are working for you.

Savings accounts have come a long way with the online revolution helping to bring a new line of very competitive products. This makes it all the more reason to review your saving accounts strategy. And don’t forget, safety is more important than ever so don’t just shop for the highest interest rates!

1.     Have a separate savings account

Many people have a regular savings account and use it as an ‘everyday’ account. This is an account where the salary is deposited and is used for everyday spending and cash withdrawals. You should focus on having a good savings account for your everyday use but have a separate high interest savings account for your dedicated savings. See Golden Rules – Tip No1, Save First Spend Later which highlights the need to be disciplined and create good saving habits.

2.   Shop around for a great interest rate

The web has opened up opportunities for banks to create savings accounts which are cheap for them to operate. Therefore, they can pass on the savings in the form of a higher interest rate than a traditional bank account. Banks are also battling amongst themselves  to establish a strong web presence and this has led to a very competitive environment and great offers to the public.

To start your research, simply type into your search engine ‘savings accounts comparison sites’ and you’re in business. Make sure you understand and accept what restrictions may come with a ‘special offer’.

3.   Compare rates and the quality of the institution

The recent global financial crisis (GFC) highlighted just how fragile financial institutions can be. Generally, banks that have been around for tens of years along with a good name (i.e. not in the press for all the wrong reasons) can be seen as the safer option.

Be careful of finance companies that might look like a bank. They may well be quality intuitions but their underlying assets might not match that of a bank. (See also tip4).  If you are not sure of the institution, leave it alone as there are plenty to choose from. And to be extra safe, you may choose more than one institution to further reduce investment risks.

4.   Make sure you know how your savings are used by the bank

Banks raise funds from the public through saving accounts and then use the money to issue loans to its lending clients. Banks and other financial institutions will also raise funds for business ventures, such as property development, which is often riskier than traditional banking. Therefore, banks may well offer higher interest rates to attract your savings to fund these business ventures.

As a general rule, the higher the interest rate offered, the higher the risk so make sure you understand the risk of your selected savings account. And lastly, if it sounds too good to be true it normally is!

5.    Keep an eye on those great rates you just got

The push by banks to get market share also means some weird and wonderful offers to get you in as a customer, (see tip 2 above). And once you’ve become nice and comfortable with the institution, be wary of your interest rate dropping. The bank strategy is simple, get you in as a customer and assume you won’t leave.  They need to drop your interest rate so they can now fund new special offers to attract more customers!

Another trick deployed by the banks is with Certificate of Deposits (CDs) and Term Deposits (TDs). The bank expects you to expect you to ‘automatically’ roll-over your deposit when it reaches the maturity date, without you fully checking the new interest rate. You should check the new rate and if it is a low (non competitive) rate, give the bank a call and if they don’t offer a better rate you should find another bank – its that simple!

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