Savings accounts are a great place to store extra funds or save for your deposit however if you have a loan or credit card debt then you should reconsider your savings account…
In my years working for one of the Big 4 Banks I saw a lot of clients young and old with all types of savings accounts. Savings accounts are a great way to store extra funds whilst making some interest from the bank.
The only issue I see is a lot of people keep their savings account even after they get a personal loan, home loan or credit card balance. In some cases that’s fine, a great way to keep your savings separate and some loans don’t allow you to ‘offset’ your savings however if you do have a loan (of any kind) that will allow you to offset your savings then consider this;
You can pay Tax on your interest
Whilst you are earning 2-3% (3% is being generous in today’s market) then come tax time you have to declare that as an income earnt which means you could be charged tax on the interest you earnt in the 12 months. My father always used to say, if you pay more tax it means you’re earning more money, so I’m not saying that’s bad however…
You pay more interest than you can earn
In the majority of cases you will find your interest rate for any loans or Credit cards is higher than what you would make in interest on a savings account. This means if you can offset it against your loan, you will save more money than you can make.
Let’s look at an example,
Jarrod has been saving for his first home, he has $10 000.00 savings and he is consistently putting more money aside. Jarrod also has a Car loan, it’s a variable car loan and the interest rate is 13.58%
Jarrod can make 2% in a savings account with his bank which over 12 months will total $200 (which will need to be declared at Tax time) or Jarrod can put it off his Variable loan and save $1358 in the same 12 months. This means Jarrod’s personal loan repayments remain the same but each payment is paying more of the principle and less interest saving him money.
As I mentioned above, it doesn’t suit everyone, but if it would work for you surely you’d rather save $1358 a year rather than earn $200.
If you would like more information or to see if this is something that would save you money please contact me.
If you are hoping to one day purchase your own home, make sure you check out the First Home Buyer’s Program aimed to help First Home Buyers from saving for their deposit through to purchasing their home and beyond.