A Better Rate of Interest? Which Cash Management Account Should I Pick?
When you’ve worked hard to pull together some money, you start to ask yourself ‘How do I get a better rate of interest?’ Perhaps you are saving for the deposit on a house, it might be a fund to pay for an overseas holiday. Whether its $2,000 or $200,000 you want to make sure that you earn a decent rate of interest while it’s sitting in your bank account biding its time, for some greater purpose.
There are a number of names for the same type of account ‘cash management account’, ‘high-interest account’, ‘at-call account’, ‘internet savings’ many names, but very similar features.
- Typically they are ‘at-call’ which means you can withdraw the funds at any time (unlike Term Deposits which are locked-in for a specific period)
- They offer a higher rate of interest than a standard transaction or savings account, in the current interest rate environment they are offering 2-4% rather than 0.1%.
- There are usually some restrictions on how you open or access the account, for instance you may not be able to withdraw funds via an ATM or transfer to other banks directly from this account, usually you will need to transfer it to an attached transaction account first
- Their higher level of interest generally has some additional conditions attached.
I love these accounts as a general rule, because they give a good rate of interest on your spare cash, without requiring you lock in a particular fixed term, and their additional hurdles to get the money helps you resist the temptation to spend your ‘nest-egg’. However not all high interest accounts are the same. We help you look at the fine detail on the conditions to make sure you are getting the best deal.
Base interest vs bonus interest
A small technical issue to get your head around before you start. Base interest vs bonus interest. Base interest (sometimes known as standard interest) is the interest that they pay everyone that has funds in this account. Bonus interest is only paid to those people who meet the particular conditions of the account. When the interest rate is advertised at the bank branch or on their website they typically quote these as a combined amount. Your base interest might be 1% while the bonus interest is 2%. You might think you are getting a good 3%, but if you don’t pay attention to the conditions, your interest is cut by two-thirds. This is why we take the time to explain the most common conditions to keep an eye on:
Minimum balances and maximum balances
This should be fairly easy to check. These accounts aren’t usually your transaction accounts, so the balance isn’t likely to fluctuate wildly on a day to day basis. Make sure you choose an account that has a minimum or maximum balance that fits your particular nest egg. Reviewing this from time to time is important if you make regular deposits or withdrawals from this account, to make sure you are still meeting the conditionals
Some accounts will only pay the bonus interest if you have no withdrawals during the month. If you think you will need to move money around from time to time, perhaps steer clear of these, a high bonus interest rate is no good if you end up missing out on it every second month because you happen to make a couple of withdrawals.
A typical feature is that bonus interest is contingent upon you making regular deposits into the account. Banks like to encourage you to deposit your salary into the account and might set a minimum of $200 or $1000 deposit into the account each month. Most banks don’t require that you deposit your salary, they will be satisfied with a deposit from another bank. This means you could set up a regular funds transfer that moves the money once a month, to make sure you meet this condition. If you are not quite sure about how it works, give the bank a ring and ask them to explain it to you.
Many institutions require that you keep a transaction account, or some other account, to qualify you to either, open the account or to earn the bonus interest rate. While this is not generally onerous, you should think about what fees they are charging you to keep this second account. Get out your calculator and check whether the extra interest you will earn outweighs any additional account keeping costs.
Honeymoon periods (my pet hate)
This is really is my pet hate. Some (not all) banks will offer you an extra 2% for say the first three months, they advertise this as the interest rate you will be paid, but looking at the fine print identifies that in three months’ time that 3.5% is going to drop to 1%. Unless you are planning to put it in your diary and shop around every 3 months, you probably want to avoid these.
So if you’ve found an account that you think looks good, and the account keeping and transaction fees seem reasonable, your final check is to make sure that you are actually dealing with a deposit account. There are products offering higher interest rates but they come with a much higher level of risks these might be called cash management trusts, mortgage trusts, unit trusts. If you are not sure whether it’s a deposit product then pick up the phone and ask the bank whether this particular account is covered by the government guarantee. The government guarantee protects consumers who invest up to $250,000 in deposit products, and is a scheme that covers Australian banks, building societies and credit unions. If the institution can’t assure you that it’s covered by the guarantee then you need to be asking a whole series of other questions.