A high rate savings account can unlock the full potential of your savings and encourage better saving habits.

Which savings account is best? We compare savings accounts so you find the best savings account and reap the rewards.

A good savings account could be the missing link that boosts your wealth and financial freedom. Just by saving a little each week or month in a high rate savings account offering wealthy returns, can be a fast and effective way to reach your savings goals. And with current competitive deals on various savings accounts you can benefit as banks are eager for your funds.

What is a high interest savings account?

A high interest savings account is designed to encourage you to save money. It offers you a relatively higher rate of interest than an everyday bank account so you'll receive a monthly or annual return on any funds that may currently be idle in your bank account.

You are actually lending your money to the financial institution, so in return for this the bank offers you part of the interest rate they charge customers. In addition to earning interest on your deposits, a savings account also provides a safe place to put your money, far better than stowing it in the mattress or the cookie jar.

The great thing about being paid interest into your account on a monthly basis, is that the interest adds to the total so that in the following month you'll earn interest on the interest. This compound interest effect will help encourage you to save more and more until you reach your savings goal.

You'll need to shop around for a savings account that offers the best interest rate. Here at Moneyhound we compare high rate savings accounts for you, so you can very easily find the one with the highest rate of interest and apply online. Almost all of these types of accounts are free to open with no minimum deposit and do not have any ongoing fees.

Some accounts offer you a higher than average rate for an introductory period of four or six months before dropping the rate back to their default rate, while others might offer a good default rate with the option of obtaining an even higher rate if you set up an automatic savings plan like a direct debit or commit to depositing $200 a month for example. So, ensure to read the offer thoroughly when you are comparing saving accounts and know exactly what you're being offered in return for your savings.

Your high interest account can be with a different institution from the one you do your everyday banking with. Online savings accounts are very popular these days and don't have accessible ATMs for instance like RAMS, UBank, and ING Direct. To access the funds in your high interest savings account with these institutions you'll need to link it to your normal everyday bank account to it, and when you do an online transfer the funds it will take 24 hours to clear before you can access it via your everyday account.

Compare high interest savings account rates now

What is a fixed term deposit?

In most cases, people can withdraw money from their high interest savings account at any time without incurring penalties, unless it's a fixed term deposit.

A term deposit is a money deposit that cannot be withdrawn for a minimum 'term'. Generally, the longer the term the higher the rate of interest that's paid to you on the deposit. You can use a term deposit to lock portions of your savings away for set periods of time.

You may be able to access your funds before the set term if you give the bank some notice, but this can affect the interest benefits. Penalties for accessing the funds before the term will discourage you from doing so, therefore if you don't trust yourself not to dig into your savings then a term deposit maybe be good for you and help you to be more disciplined with your savings goals such a new car or a holiday.

Compare fixed term deposit rates now

Which savings account is best?

Typically, your everyday transaction bank account will be set up for usability and frequent spending. Your bank might offer great account features such as a free transactions or purchases each month and access to ATMs. These features might save you money on EFTPOS fees and credit or debit card transactions, however all of these features are suited to spending money, not saving.

A high interest savings account works differently by taking features that encourage spending and replacing them with incentives to save. Moneyhound makes comparisons of high interest savings accounts easier, and with higher interest and lower fees you could start to see your savings accumulate very quickly.

You may find you are best suited to an online savings account when it comes to a high interest savings account. With features such as daily access, cheque payments and EFTPOS being less essential to your high interest savings account, an online savings account could offer you high interest with the best return but you can only access it via the internet.

How is interest calculated on high interest savings accounts?

With interest determining how fast your savings grow in a high interest savings account, it makes sense to compare current rates. Your returns will be calculated on the interest percentage rate you choose.

Most banks will base their high interest savings account rates around the Reserve Bank’s official cash rate. If you factor in bonuses such as milestone rewards and meeting minimum deposits each month, high interest savings accounts in Australia can often return more than 5 per cent. Meanwhile, rates on transaction accounts may be more like one to two per cent.

Compound interest should also apply to your high interest savings account. Your interest rate will be paid on your principal amount as well as interest earnings. You should be able to earn interest on top of your interest, and most Australian banks compound these calculations daily and pay into your account each month so you can watch your savings grow quickly.

This graph shows how easy it is to earn interest with a high rate savings account:

With a starting deposit of $3080 and regular monthly deposits of $501, at 6.5% p.a. you could earn over $6,400 in interest.

Related: 5 ways to generate additional income

Top tips for getting the most out of your high interest savings account

1. Start comparing now

With Moneyhound making it easy to make comparisons of high interest savings accounts, your new interest rate should be easy to lock in without costing you the time to visit multiple banks or websites.

2. Compare the amount applicable to you

Some high interest savings accounts and term deposits might offer different interest rates for locking away different amounts. Be realistic about the amount you expect to save and the time frame you have in order to get a true comparison.

3. Compare standard and introductory rates

Make sure you check any introductory rates to see what rate applies after any honeymoon period. It may be better in the long term to lock in a high interest savings account with a steadier and higher default rate.

Related: How to avoid living paycheque to paycheque

4. Consider rate flexibility

Check that the rate on your high interest savings account isn’t going to be outdone by other options in the future. Look for a term deposit where the interest rate can be upgraded or allows you to withdraw and reinvest your funds.

5. Watch rewards and penalties

Consider whether you have the ability to lock your funds away for the intended period of time. A high interest rate account will not be worthwhile if you have to access these savings often.

6. Question your ability to get the advertised rate

The full rate on your high interest savings account might only be paid if you meet monthly deposit minimums. Check to see whether these are realistic goals for your monthly habits.

Related: Smart money rules to live by to get financially ahead

7. Compare any fees

Is your bank going to charge you for the privilege of a new high interest savings account? Calculate the interest you expect to earn and ensure any fees don’t offset your benefits.

8. Automate your habits

Set up consistent and automatic transfers between your accounts so your high interest savings are topped up periodically. You will be less tempted to spend your savings and you may unlock extra interest rewards as you meet your account milestones.

9. Pay your savings first

Consider getting your salary or wages paid directly into the high interest savings account, then transfer your personal allowance for spending into your everyday transaction account. This way you are earning interest on all your income from the day you get paid. This process will also help you budget ensuring you stick to a set amount for spending, ensuring you save the rest.

What other savings account features could you benefit from?

While you are doing your homework on high interest savings accounts, you should also check on the features of your other savings accounts.

Consider whether you could consolidate your funds into a single account and start saving on fees. Even if you don’t pay account-keeping fees, small amounts of money sitting idly in other accounts won’t be accumulating any interest.

Look at how much it costs each year if you are in the habit of withdrawing more than your limit. You may even be better off choosing an account where these types of transactions are blocked, ensuring you never pay overdrawn fees.

Spending a little time researching the best deal for your money may see you unlock the full potential of your savings. If your recent savings regime is in need of attention, a high interest savings account could be the first step towards better financial habits.

Has this information been useful? Let us know by using the feedback button below.

Compare and find a savings account now