Banking: Michelle Baltazar
Avoid unnecessary fees and charges on your account and shop around for a better interest rate
Not all savings accounts are created equal. Some have higher interest rates, some charge extra fees and others have “bells and whistles” to help you save more.
So how do you know your money is in the right savings account? How can you make the most of the account you have? Here are some pointers to get you started.
Split your accounts
Do you have an everyday transaction account? The one you use when you go to the shops or to pay your weekly rent, occasional (or regular) coffee and buy stuff online? If you have more than $2000 at any given time in this account, it pays to link it to a savings account. This will attract a higher interest rate on your savings that are most likely just sitting there in your transaction account (check our Best of the Best issue to see the range of interest rates offered by various savings and transaction accounts).
So let’s say you had $7000 in your account and you split it into two, with $5000 going into a savings account that attracts a base rate of 1.68% and earns $84 a year. Assuming you make only one ATM transaction a month on your savings account and unlimited transactions on your transaction account, then the interest you will earn over five years would be around $420. The point here is that you can make a few handy dollars each year by choosing an account that offers higher interest, no matter how small.
Test your fees knowledge
In 2017, the buy now, pay later provider Afterpay earned 24% of its annual income from late fees. And the consumer body Choice found that in the same year households paid nearly $480 on average in banking fees.
I’m quoting 2017 figures because the industry has responded and now there are many products that will cost you nothing – so long as you understand the terms and conditions.
For example, all big four banks offer accounts with no monthly fee as long as you deposit a minimum amount each month. NAB’s Classic Banking Account doesn’t even require a minimum deposit.
Outside the major banks, there are plenty of institutions that now offer feefree savings or transaction accounts.
Other fees to watch out for include internet banking fees, EFTPOS fees,
ATM fees (if you exceed the number of transactions you’re allowed to make), non-bank or foreign ATM fees (banks such as ME, for example, would refund ATM fees), dishonour fees (as high as $30-$50) and “exceeding your credit limit” fees.
If your bank still charges phone transaction or branch withdrawal fees, you may want to switch as they should be part of the service.
Boost your credit score
With the launch of open banking, which allows for easier sharing of financial data between banks, a strong savings profile will help you get better rates and terms when you apply for a home loan, buy an investment property or borrow capital.
It pays to shop around and pick the best savings account for your needs. Doing so means more interest paid on your account, zero to low fees (they all add up) and a higher credit score, which rewards you yet again with more savings.
Michelle Baltazar is editor-in-chief of Money. She has worked on various finance titles, including BRW (now closed) in Australia and Shares magazine in London.
I’m often asked why people choose to hold badly performing investments, stick with banks that charge higher rates or stay with high-cost or benefit-light insurance providers. Is it laziness? A misguided sense of loyalty? Or are there some other common behavioural drivers at play?
An efficient market relies on us being rational decision makers, willing to change suppliers when there’s good reason to do so. However, even when bank and insurance customers have good reasons to switch, they’re unlikely to change.
Even the recent royal commission and very public banking scandals have had a weak impact on consumer behaviour. Behavioural economics research shows that unless they have been directly impacted by a scandal, customers are unlikely to take advantage of better offers from competitors.
Multiple research papers examining developed nations between 2016 and 2020 consistently show a staggeringly low rate of 3%-6% of people switch to a better deal. So, what is going on? The answer is something I discovered through my own experience as a proud owner of a second-hand 2003 Land Rover Discovery – the “Toorak tractor”.
I bought my Discovery online and flew all the way from Brisbane to Melbourne to pick it up. I loved it. Problem was, as much as it pains me to admit, it was actually a bit of a lemon. Each year I would spend thousands fixing problems that would thrust me into “limp home mode”, but I still loved it. Even when the suspension bags blew out on a Fraser Island trip, forcing us into a 4WD driving holiday without any suspension at all, I still preferred to spend money on the Discovery rather than change to a cheaper, more reliable alternative.
Why I stayed with my choice primarily boils down to three key psychological drivers: sunk cost, confirmation bias and the “better the devil you know” trap. The same drivers are working against us when we should shift financial institutions or let go of poor-performing investments.
I had paid a lot for the car and had spent a great deal of time and effort getting it home. I had “sunk” a lot of cost into it. Further to this, every time I had an expensive service or repair I would convince myself that it would be the last one and I was about to enjoy a long period of expense-free driving. With things like mortgages, insurance policies and shares, we often “sink” so much time researching and going through arduous application processes that we convince ourselves we’re better in the long run sticking with our choice in the face of cheaper options. We’re simply too invested in the current solution to be open to the idea of change.
My ego was clearly also playing its part. I simply ignored any evidence suggesting there was a better choice and surrounded myself with other enthusiasts who shared my views and bolstered my identity. We have an in-built confirmation bias that means we take note of all the bad stories about other options and dismiss any evidence that questions our choice. Our ego doesn’t like being proven wrong.
The final mental hurdle was me assuming all car companies to be the same, and switching brands would simply be jumping out of the pot and into the fire. Better the devil you know than wasting time and money only to end up in the same place.
This is our brain’s survival mechanism telling us that while our current situation may not be ideal, at least we’re surviving and change could actually mean we are worse off. We tend to prefer losing money with the status quo than going with something that feels unknown and therefore more risky.
When assessing your finances, ask yourself if you really have made the best choice, or are you propping up a Toorak Tractor?
Phil Slade is a behavioural economist, psychologist, and co-founder of decision architecture firm Decida.