Make Savings Work

Newcastle Herald

Monday February 9, 2004

SMH

A decent rate of interest is a must when it comes to your savings, writes Vita Palestrant.

IF you're serious about saving, your first step should be to ensure that your money is working as hard as possible for you.

That means getting a decent rate of interest on your savings account.

Online comparative shopping can be easily done by checking the rates on offer from institutions on the websites of research houses such as www.cannex.com.au and www.infochoice.com.au.

The good news is the official cash rate at 5.25percent is expected to rise by 0.25percent in the next few months.

Last Wednesday, the Reserve Bank opted to leave interest rates on hold following back-to-back rises late last year. Analysts expect the bank to raise the cash rate between 5.5 and 6percent by the middle of this year.

Currently, you can earn more than 5percent by putting your money in an online savings account. That's more than the 0.1percent offered on most transaction accounts.

Internet accounts also offer a flat rate on all amounts, which means they are ideal for people who don't have much set aside and are starting to save in earnest for the first time.

However, once you have saved a sizeable sum, you may be better off transferring the money to a term deposit where you can get close to 6percent provided you don't need ready access to the cash. Also, be aware that most term deposits are tiered, with higher rates paid for larger amounts invested.

``There's a big variance in interest rates out there and you can lose out if you don't do your homework," says Andrew Willink, the managing director of financial services research firm Cannex. ``The online accounts are close to the money market rate, but you can achieve slightly higher rates with a term deposit for six months or longer.

``If you have a goal to achieve, in a year or two, pick a term deposit with a higher rate. It's worthwhile because it is compounding and an additional 0.25 to 0.5percent will help you achieve your goals faster."

Willink says you should look beyond the nominal (or advertised) rate at the effective rate, which takes into account the frequency with which interest is paid.

The more frequently it is paid, the faster your money will grow, as interest is compounding on interest.

As an example, if you look at the rates for $50,000 fixed for one year, AMP offers a nominal rate of 5.95percent, which is slightly higher than that offered by Community First Credit Union at 5.9percent.

But the latter has a better effective rate 6.06percent because it pays interest monthly rather than semi-annually.

The best time to lock in to a term deposit, says Willink, is when money markets are running hot on the expectation of a rate rise, because they typically overshoot the mark.

SMH

© 2004 Newcastle Herald

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