Savings accounts are one of the most commonly used products in retail banking. There’s a good reason for that. Banks need people to deposit money with them so that they can put it to work. However, not all savings accounts are created equal. Finding the right one, especially for people abroad, is a challenge, to say the least.
We break down the different types of accounts, so you have everything you need to know to choose the right one.
Before diving in, let’s quickly define some of the terms we’ll use.
A deposit account is a bank account where investors keep their money. These can either be current (or “checking” if you’re American) or savings accounts. There is a bit of a distinction in “time deposit” accounts, but we’ll cover that below.
A current account is where we keep our money for daily purchases. Your bank links your debit card to this account.
A savings account is where we keep our excess cash away from our daily purchases. It’s meant as a safe storage place. Some banks give you a card to this account, others don’t.
We’re going to use the words deposit, and savings account interchangeably in this article. That said, we are generally referring to the “savings” function, and not a checking/current account.
- There are three different savings accounts: basic, “premium,” and term/time deposits.
- Unlike the first two, term/time deposits have strict withdrawal rules
- The interest rate paid depends on the bank’s demand for deposits as well as general market conditions
Different savings account types
Savings accounts come in a few different flavors. These range from basic savings accounts to term deposits. Banks set interest based on two factors:
The base interest rates set by central banks and;
Their needs for deposits.
Banks are in the loan-making and investment business. Interestingly, they only need a fraction of their clients’ deposits on hand at any given time. They then take the rest of the money and either lend it out or invest it.
When a bank wants to grow, it will offer higher rates to entice people to deposit their money with them. Keep in mind, though, that higher interest rates come with greater risk.
General savings accounts are the most vanilla type of deposit accounts. It acts as a ‘firewall,’ protecting the account holder from overspending. Almost every bank offers its clients a savings account for these purposes free of charge.
Since banks generally expect you to move your money in and out of this account regularly, they do not provide any bonuses for them. Therefore, these accounts pay the lowest interest rate.
“Premium” savings accounts
Premium savings accounts are next up the ladder. Like basic savings accounts, banks offer these free of charge. Likewise, clients can move their funds freely in and out.
Savers are encouraged to leave their money in these premium accounts a bit longer since the bonus gets paid annually. That said, the bank is free to adjust the premium at any time. This liberty, in turn, creates a risk for savers.
If the bank lowers the bonus rate, then savers will earn less. Of course, if the bank raises the bonus, then savers gain more.
In the UK, there is an additional type of savings product called “notice accounts.” A notice account pays higher interest like a premium one. However, the account holder must give the bank a notice if they want to withdraw their money. The bank will then only release the funds once the notice period ends. Likewise, if the bank changes the rate, it will be done at the end of the notice period. The length of the notice period varies but can be anywhere from 30 to 180 days.
Note: In the United States, these are sometimes called “money market accounts.” While the features are similar, the rules are different depending on the jurisdiction.
Time or term deposits are the ‘highest’ level of deposit accounts. They offer higher interest than their savings account cousins. In the UK, they’re sometimes referred to as “fixed rate bonds.” However, there’s a catch: unlike the other two account types, savers cannot easily access their money.
The banks need to ensure that they have enough cash deposits over a specified period. Time deposits allow them to ‘lock in’ that amount for the duration of their needs.
In exchange, the bank pays account holders a premium for essentially lending them money. If the saver needs their money back, they have to pay a penalty fee to receive it.
In other words, time/term accounts are loans made by bank customer to the bank.
The interest paid on a time deposit account varies depending on a few factors. These include how much the bank needs and the duration of the deposit. As a general rule, the longer the length of the deposit, the more savers will receive.
This relationship makes sense. Parking your money for a long time means you might miss out on better-paying investments. Banks are also aware of this and will occasionally adjust their CD rates.
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When to use which account when you live abroad?
For people living abroad, selecting savings and deposit accounts depends on three questions:
- How fast do I need my money?
- Where can I get the best rate at these terms?
- What currency do I want to save in?
If an expat or digital nomad needs the money quickly, regular or premium accounts are the way to go. Some banks offer better rates than others, and if there are no fees to sign up, then the answer should be straight forward.
Finally, some people abroad might need to save money in different currencies. In that case, it’s better to look for a savings account in the target currency. By doing so, you will avoid the impact of the forex market when you reach your goal.
Of course, there are also some tax considerations. Each country taxes interest from savings accounts differently.
For simplicity’s sake, it usually makes sense to keep a savings account in your country of residence (i.e., where you pay taxes). The tax reporting headache isn’t worth it with today’s low rates.
For time/term deposits, it really depends. There are some websites, like Raisin, which compile the best time/term deposits in Europe. If one of these accounts meets your goals — for both the rate and the period — then it could be well worth it.
In either case, we recommend checking with a financial adviser to ensure that you find the best place to park your savings.
Abroaden is a company for expats, digital nomads and other world citizens looking for low-cost and transparent financial advice and investment management.
Note that this article is for information and educational purposes only. It does not constitute financial advice.