Savings, fixed/term or notice deposit accounts offer consumers the simplest ways to save money in the bank. But, in order to make the most of any account, you need to understand it, the conditions attached to it and how it differs from other products like it offered by other banks. In the fourth article in the Scrapbook Series, we take a back-to-basics look at all you need to know about saving money in the bank.
The simplest savings products offered by banks are savings accounts, term and notice deposits.
A savings account is a bank account which allows you to earn interest on the money that you accumulate in that account. Fixed/term and notice deposits are similar to savings accounts but have restrictions on when you can draw the money and generally have higher minimum deposit requirements. Because of the restrictions, you earn a higher rate of interest on fixed/term and notice deposits than you do on a savings account.
Savings accounts
Savings accounts are useful for people who want to put away a relatively small amount of money on a monthly basis. A savings account is flexible because you can deposit money into it and draw money from it at any time, although you may have to keep a minimum amount in your account in order to earn interest and to keep the account open.
Banks may require a minimum amount in order to open a savings account. At NBS, you can open a savings account with R50. At Absa you need R500 and your balance can not drop below R50. Nedbank requires R500 to open a savings account, Standard Bank requires R500 and FNB requires R50.
The more money you put into the account, the more interest you will earn. The interest on a savings account is calculated daily.
Once interest is added to your account at the end of every month, you begin to earn interest on the money you put into the account as well as on the interest. Interest on interest is called compound interest and it is a powerful way to grow your money over the long term.
Banks often require that you keep a minimum amount in the account in order to earn interest. At NBS, the minimum amount is R3 000, at Absa , Nedbank and Standard Bank it is R500 and at FNB it is R1 000.
Savings accounts are useful for building up funds for unforeseen expenses, such as car repairs, or for a particular goal, such as an overseas holiday. It can also be used to accumulate money for an investment that requires a larger sum which you do not yet have.
Fixed and notice deposits
With a fixed/term deposit, you invest for a fixed term. You have restricted access to your money and usually cannot add to it.
Before you invest your money in a fixed deposit, you decide on how long you want it invested. Banks offer fixed deposits from one month to 60 months. The interest rates depend on the term of the deposit, but the rate will be fixed for the period of the deposit. Interest is paid monthly, quarterly, every six months, annually or at the end of the term, according to your choice.
Interest earned on a fixed deposit is not added to the existing investment but is paid into an account of your choice by cheque or at the end of the term with your capital. Fixed deposits generally pay a higher rate of interest than savings accounts and notice deposits.
You cannot trade a fixed deposit. In other words, you cannot dispose of it to somebody else, but you can use a fixed deposit as collateral for a deposit on a loan.
With notice deposits, there is no fixed term for which you must invest, but you are required to give the bank notice before you can withdraw your money. Banks generally offer 30 or 32 days, 60 days and 88 days. This means you must give the bank 30, 32, 60 or 88 days notice before you can get your money.
Keep in mind that if you invest your money in a notice deposit, you are tying it up for at least as long as the notice period. If you need it urgently, you can access it without giving the full notice, but you will be subject to an interest penalty. The penalty varies between banks.
Unlike fixed/term deposits, you can generally add money to the notice deposit, by way of, for instance, a stop order on your current (or cheque account) each month.
The interest rate you earn on a notice deposit varies according to market conditions and also depends on the amount you invest. The higher your balance, the higher the interest you earn. Interest is payable monthly and is paid into an account of your choice or it can be added to the investment, so that you earn compound interest.
While interest on these accounts is generally higher than on savings accounts, the interest is not as high as it is on fixed/term deposits.
There are generally minimum amounts required for investing in a notice or a term deposit. Absa, FNB and Standard Bank all require a minimum investment amount of R1 000 for both fixed/term deposits and notice deposits. NBS require a minimum of R5 000 for both, and at Nedbank you need R10 000 to open a fixed/term deposit and R5 000 to open a notice deposit.
These investments are ideal for people who want to earn interest on lump sums of money, such as an annual bonus. Because notice and term deposits pay higher interest rates than savings accounts, investors should move accumulated savings from savings accounts into notice or term deposits as soon as they have saved the minimum amount required.
Disadvantages
The main disadvantage of savings, fixed/term and notice deposits is that they are eroded by inflation, so you may get a negative return after taking tax and inflation into account. If your returns do not match or beat inflation, after tax, your money is losing value. While these accounts are useful for emergencies, you should not put all your money in these accounts - especially not for a long time.
Tax implications
The interest income you earn from any investment, including those from savings, fixed and notice deposit accounts, is tax-free up to R10 000 a year if you are under the age of 65 and up to R15 000 a year if you are over the age of 65.
Costs
You do not pay commission, investment costs or transaction costs when investing in fixed or notice deposits. Neither are there any commission or investment costs with savings accounts, although there are transaction fees on savings accounts. Typically, you are charged transaction fees if your balance falls below a certain amount. If you maintain the required balance in your savings account, fees may fall away. The idea is to encourage you to save.
To keep transaction costs to a minimum, always use an automated teller machine rather than doing your transactions over the counter inside the bank, which is very costly.
Savings account tips
- Before opening a savings account, you should have a clear idea of what you need the account for. Some accounts are geared for transactional purposes, others for savings and some are a combination of both. True savings accounts generally offer higher interest rates and should, if possible, not be used for transactional purposes because they tend to have higher bank charges. Transaction accounts usually offer lower transaction charges as well as lower interest rates on savings. So, if you want an account in which to pay your salary or wages and from which to make your monthly account payments, a transmission account is the right choice. If you intend using the account to save only, then ask for a true savings account.
- Doing your transactions at an ATM is cheaper than over the counter inside the bank. It's also cheaper to use your own bank's ATMs rather than another bank's.
- Information for this article:
From own research, as well as the books Do you know your Bank? by Dirk de Villiers (published by Metz Press) and Personal Financial Management by Nico Swart (published by Juta & Co).
Next week:
Cheque accounts