In this article I'll explain everything you need to know about savings accounts including what they are, the types, when to use them and how to choose one. In my money system article I explain how your savings account fits into your overall financial system so check that out if you haven't already.
Many people get confused about this surprisingly, conflating many types of financial accounts and investments as savings accounts when they aren't the same thing. Savings accounts are accounts offered by registered banks or non-bank deposit takers that pay interest on your deposit.
The money you put into these accounts are not invested into any other type of asset, they are simply held by the bank until such time that you want to withdraw it.
In the mean time banks can use the money to allow them to create more loans but this is quite a complex topic so I won't get any further into those mechanics here.
This means that fundamentally, the only risk your money is exposed to is the risk of that bank failing and otherwise the value of your deposit will not fluctuate like other assets (other than earning interest on top of your original deposit).
The only difference between savings accounts are the interest rate you get and how restricted you are to withdrawing the funds. Generally, the more restrictive the account is, the more interest it will pay you for that commitment. This is because banks can then more easily plan on having a certain level of deposits.
These are the three types of savings accounts:
On-call means that you can withdraw the money at any time without notice. Some on-call savings accounts will have a bonus interest rate if you meet certain requirements like increasing the balance by $50 per month or not making any withdrawals. Sometimes banks will even charge you fees if you make too many withdrawals.
Notice savings accounts are exactly the same but require to give a certain amount of notice like 30 or 90 days which practically means you initiate a withdrawal and choose a date for that withdrawal at least that far into the future. In the mean time you can continue to deposit money into it as normal and you will earn whatever the current interest rate is.
A term deposit is the most restrictive where you actually lock in both the term and the interest rate. Because of this they generally have the highest interest rates available. You have no protections under the law to get access to this money early unless you come to an agreement with your bank, some banks have looser restrictions and regulations than others.
Each of these types of accounts can be offered as a PIE (Portfolio Investment Entity) which is a tax structure originally created for KiwiSaver that essentially caps your tax rate at 28% (which is the company tax rate) so if you are in a higher personal income tax bracket you should seriously consider accounts with this tax structure.
Firstly, I'll say that as a general rule because the risk of savings accounts are very low (the value of your deposit doesn't change) you will on average be getting a lower return on your money than some kind of investment (who's value does fluctuate) because you are taking on more risk. This means you should actually try to minimise your how much you keep in "cash" (which are physical cash and bank deposits) because you are paying an opportunity cost as well as inflation eating away at the value of your money.
Infact, interest rates are generally lower than the rate of inflation because central banks use this to stimulate or cool down the economy to keep inflation within an acceptable range. So you could argue that money kept in a savings account will on average always be loosing money to inflation and therefore should not be thought of as an investment.
Therefore, your cash position should only be just enough to cover your day to day spending between paydays and some extra for unplanned expenses that may come up. Beyond this, you should only have more in savings if you are looking to use that money within a few years for say a house deposit. The rest should be invested to get a higher return.
The only exception to this rule may be if you are entering retirement and are more interested in creating an income portfolio but again that is not the focus of this article and if you are unsure of anything you should seek financial advice for all matters especially retirement planning.
If then we accept that savings accounts are not investments and are simply less bad than keeping money in a no-interest account or in cash, then it makes sense that we want to save our money in accounts with minimal restrictions and no fees (there is no reason to be paying fees on a savings account).
This means that you should be looking for the highest interest rate you can get with the least restrictions. You can use comparison websites like interest.co.nz to compare the interest rates of different accounts.
I've even made a firefox or chrome extension that allows you to automatically sort the tables on this website by interest rate. Remember to check the credit rating of the institution and make sure you are comfortable keeping your money with them.