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This
booklet gives information of a general nature and is not intended
to be relied on by readers as advice in any particular matter.
You
should consider consulting a financial adviser regarding how this
information may apply to your own circumstances.
Other
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Banks offer a broad range of banking, financial, investment and payment services.
People need banking products and services for many reasons. Having a bank account helps you manage your day-to-day finances and keep track of your money.
Benefits of having a bank account include:
- Provides you with a convenient way to organise your money and finances. For example, you can receive money in the form of salary or government benefits, or from other sources; pay for goods and services without having to always carry around a lot of cash; pay bills cheaply and easily; or transfer money to someone else.
- Provides you with a safe place to keep your money, especially in uncertain economic times. Deposits are capital guaranteed. Banks are heavily regulated, and prudential standards are in place to ensure that depositors’ funds are as safe as possible.
- Helps you establish a track record of good financial habits. Being able to show you can save money demonstrates your ability to repay a loan. For example, when the time comes that you need to borrow money from a bank to buy a house or a car or go on a holiday.
- Makes it easier for you to save and build your financial assets. Money held in a bank account is extremely liquid, meaning that it is easy to access your funds in cash, at short notice. Many bank accounts pay interest, and are structured to encourage you to save.
Did you know?
In October 2008, the Federal Government announced that it would guarantee bank deposits held in Australian financial institutions. The measures were announced in response to the global financial crisis. Under the guarantee, the Federal Government will stand by total deposit balances up to $1 million in Australian banks, credit unions and building societies for three years. Most banks will offer customers with total deposit balances over $1 million an option to ‘opt-in’ to the guarantee scheme. |
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WHAT IS INTEREST?
Just as you pay interest on money you borrow from a bank or other lender, you can also earn interest on money you ‘lend’ to the bank.
Interest is the money you are paid by the bank on money you have deposited with the bank.
The amount you earn in interest depends on a number of things, including:
- the interest rate,
- the method of calculation, and
- how often interest is paid.
The interest rate is usually expressed as an annual percentage. The higher the interest rate, the more your money will earn.
The method of calculation will affect how fast your money grows. Simple interest is calculated on the principal amount.
Compound interest is similar to simple interest, but the interest that is paid periodically adds to your account balance, which means that you earn interest on interest. While the interest rate itself stays the same, the amount of interest grows as it is being earned on a larger sum.
How often interest is paid can also affect how fast your money grows.
Your account balance in a transaction or savings account is likely to fluctuate regularly as you withdraw or add money. For their transaction and savings accounts, most banks calculate interest on a daily basis, which is then paid into your account on a monthly basis.
Whereas the principal amount in your term deposit isn’t likely to change, unless you withdraw your money before the end of the specified term. For their term deposits, most banks calculate interest at the end of the specified term. |
Did you know?
The way interest is calculated can impact on your savings. With some bank accounts, interest is calculated on the lowest balance during the period of calculation, for example, one month. This means if your account balance has been very low for just one day during the month, the amount of interest you earn will also be low – regardless of how much money was in the account for the rest of the month. With some bank accounts, you could earn a higher rate of interest if you don’t make a withdrawal during a period, for example, one month. This means you could earn more interest on your savings – as long as you don’t make a withdrawal. |
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Know the interest rate on your account
Interest rates can change. Banks publish their interest rates in newspapers and on their websites. You should make sure you know the interest rate applicable to your bank account. |
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CASE STUDY: SIMPLE VERSUS COMPOUND INTEREST
Bob opens a term deposit with a principal amount of $10,000 paying 5.0% pa interest for 1 year. Most term deposit accounts pay interest only at the end of the specified term, calculated on the principal amount deposited. After 1 year Bob will receive interest of $500 and the total amount Bob has is $10,500. Bob decided to open another term deposit with a principal amount of $10,000 paying 5.0% pa interest for 1 year, and spends the $500 interest earned. At the end of the second year, Bob has $10,500.
Jane also opens a term deposit with a principal amount of $10,000 paying 5.0% pa interest for 1 year. After 1 year Jane will receive interest of $500 and the total amount Jane has is $10,500. Unlike Bob, Jane decides to reinvest her term deposit for another year, with the principal amount of $10,500 paying 5.0% pa interest for 1 year. At the end of the second year, Jane has $11,025.
‘Compounding’ is the process by which your savings or investments will increase in value by ever-greater amounts, if interest earned is reinvested. After 10 years, if both Bob and Jane continued to save in the same way, and Bob continued to spend the interest earned, Bob would have $10,000 and Jane would have $16,289*. The reason for the difference is the amount that future interest is calculated on – the interest reinvested increases the principal amount.
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