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Good savings products

Posted on 16 March 2012 by Diana Clement | 1 comment
Category: Savings
carrot on a stick

The banking industry is often criticised for its poor savings products, yet savers can vote with their feet and get better returns – sometimes several per cent per annum in interest.

RaboDirect’s new offering - 0.9% extra on top of the standard interest rate for new on call savings – got me thinking about these “good savings products”. 

There is of course no one-size-fits all savings account; people have different needs from savings accounts.

Related video

How to choose a savings account

Some savers, for example, may be willing to forego a few basis points on the interest rate to get a multi-currency account.  Others, for whatever reason are fired up by prize accounts – although it should be noted that these accounts are rarely good value for money.

Some of the good savings products available include:

Cash Pies. Cash Pies are savings accounts with a twist. The added bonus is that you pay a lower “effective” rate of tax on these savings than you do on other income, which means the taxman skims off less and your savings grow faster overall.

Term deposits. These are “good” savings products if you are saving for the medium term and don’t need the money at short notice. The interest rate is usually higher than on call accounts.

Notice saver accounts. These are like term deposits, but allow you to simply give a certain amount of notice when you need the money.

Pooled bank accounts. These accounts allow you to “group” your savings with that of others in your family and earn a higher interest rate.  . 

Investment savings. Savings don’t need to be into a bank account. Some people “save” straight into a managed fund or share purchase schemes. Their new units or shares are added each month to an existing investment.

Matched savings. The government and employers “match” KiwiSaver payments, in part. That means an instant return on savings. Sometimes other organisations “match” savings. For example, Ngai Tahu whānau who save into the Whai Rawa  savings programme, have their savings matched by the iwi up to $200 per adult.  Child members, who save into their Whai Rawa account, will receive matched savings at a ratio of 4:1 up to the maximum of $200.

Save your change. Products that encourage you to save your change are excellent. Every time you spend something the change is rounded up to the next dollar and transferred automatically to a savings account.

Some “bad” savings products can actually be good in the right hands. For example these two products work well in very disciplined savers’ hands:

Revolving credit mortgages. Every dollar the people put into their revolving credit mortgages, even if only left there for days or weeks, is effectively earning a tax-free return at the mortgage rate. It’s hard to beat that.

Bonus saver accounts. These accounts have a standard interest rate and an additional “bonus” interest providing you adhere to certain rules – such as only making one withdrawal a month.

Remember it’s not worth opening complex savings accounts if the returns aren’t as high as simple ones such as online savings accounts.

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Why doesn't RaboDirect compare their interest rates with the rate of inflation? According to Statistics New Zealand the current (23/12/11) rate of inflation is about 4.6% (http://www.statistics.govt.nz/browse_for_stats/snapshots-of-nz/top-statistics.aspx). RaboDirect's current (23/12/11) 1 year term deposit rate is 4.1% pa. (http://www.rabodirect.co.nz/current-rates.aspx) Obviously it's a bit more complex than this(*), but comparing the two rates would suggest that RaboDirect's 1 year term deposit would actually lose you money in real terms. (*) Of course you'd also need to factor in taxes, as well as a person's risk preferences and their personal inflation rate(+). (+) Not everyone faces the same inflation rate. The Consumer Price Index is based on the price of a "basket of goods", but no one actually buys the basket of goods. e.g. If the basket of goods that Statistics New Zealand uses includes tabacco, but you don't smoke, your personal inflation rate will be based on a different basket.
Compare Interest Rates with Inflation RatePosted on 23/12/2011 9:25:00 a.m.

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