Switching could put $800 back in your pocket
Idea
If I offered you $800, you’d probably accept it. But countless Australians are leaving that much money on the table by keeping their savings in the wrong account.
Four big banks alone reportedly has almost $370 billion in low or zero interest customer accounts. That’s over $16,500 for each Australian adult (although it’s not actually that evenly distributed).
Currently, the best high-interest savings accounts pay just over 5 percent. On a balance of $16,500, the difference between these high-interest accounts and the zero-interest account is over $800.
This is more than three times larger New WATO tax credit of $250 The government has just announced. Worse, these differences compound greatly over time. When we look at a period of 45 years (for example, from age 20 to age 65), the difference is almost $140,000. That’s more than two brand new Teslas!
These 5 percent savings offers are not complex products, but zero-risk accounts that give you access to your money whenever you want, penalty-free. The dirty secret of the banking industry, request You can keep your money in a low-interest bank account. This is how they make their money.
There’s a term that bank CEOs obsess over but the public doesn’t know: “net interest margin” (NIM). It is the difference between what a bank earns from its investments and its loan income, minus the amount it pays us for our savings.
Don’t forget to check that your parents, children, siblings and friends are also making the most of their savings.
For example, if their earnings on mortgages and investments average 5 percent, but they only pay an average of 3 percent interest on their savings accounts, they make money on that 2 percent difference. That might not sound like much, but at the scale our major banks operate, this represents billions of dollars in gross profit.
So they to trust It’s up to us to forget where we put our money so they can make billions. Banks also use some tricks to increase their NIM.
First, they offer promotional interest rates. We think we made the right decision by signing up for the advertised 5 percent high-interest savings account, but the detailed information states that the rate only lasts 4 months before dropping to 1 percent.
Second, banks set “bonus interest” conditions that you must meet to receive the full advertised rate.
They might offer a “5 percent” rate, which consists of a base rate of 0.1 percent and a premium rate of 4.9 percent. To benefit from the bonus rate, you may need to spend a certain amount of money, increase your bank balance each month, not withdraw money, or meet other requirements.
Going through these stages may seem simple, but a 2023 report from the Australian Competition and Consumer Commission (ACCC) reveals: 71 percent of bonus interest accounts I did not receive any bonus interest in any month.
Even worse, some banks determine basic interest rates The rate is as low as 0.01 percent, which means not meeting the bonus interest conditions will leave you with basically nothing. So why do we leave so much of our money in these low-interest accounts?
Harvard University Professor John Y. Campbell, a world-leading expert on personal finance, tells me that “many people still think of their bank accounts as cash,” and so they don’t realize they can earn reasonable interest rates on them.
Campbell also points to behavioral economics to explain why we don’t react emotionally to an extra 5 percent interest the same way we react to an extra $140,000. He says we tend to “pay more attention to the larger number” because people rely on “cognitive shortcuts.”
So what can you do about this?
When you have time (perhaps on a quiet Sunday evening), I recommend doing a quick check of which accounts most of your money is in. Multiply your bank balance by the difference between your current interest rate and 5 percent (the current market-leading rate). This should bring back the amount of money you lost as a result of your sub-optimal savings account.
As I mentioned before, if you don’t want to pull out the calculator, AI chatbots are pretty good at helping with this arithmetic.
According to Campbell, knowing the dollar figure is much easier for us to intuitively understand than knowing the percentage point difference. $1000 means five weeks worth of shopping. 1.35 percentage points is less concrete.
As a general rule, if you’re getting much less than 4.5 percent interest, it may be worth finding a new bank for your savings. Unless you’re absolutely sure you’ll meet the terms each month, it’s usually best to find an account without terms.
Then set a reminder every 6 to 12 months to verify your savings are in a competitive account. This is not a set-it-and-forget-it process, as banks change their offers regularly.
Don’t forget to check that your parents, children, siblings and friends are also making the most of their savings. It’s in your bank’s best interest to forget about your crappy savings account. Your future self will thank you if you don’t.
Max Yong is a lecturer in personal finance at Harvard University. He previously lectured on personal finance at the University of Melbourne.
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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Max Yong is a lecturer in personal finance at Harvard University. He previously lectured on personal finance at the University of Melbourne.
