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04.Cash management accounts

Money management

Banks pay interest on deposits because they can then lend that money to borrowers, such as people looking for a home loan, at a higher rate of interest. This is an important way banks make money, and these deposits (there are a range of different types) account for around half the money banks need for funding.

A big proportion of the money banks lend out is sitting in transaction accounts, which almost always earn little or no interest. In 2009, the RBA estimated about 17% of deposits in the major banks were in transaction accounts. If you apply that same figure to January 2011 data from Australian Prudential Regulation Authority (APRA; adjusted slightly to market conditions), we can estimate that there is around $153 billion in transaction accounts earning no interest just with the Big Four.

That’s a lot of interest people are missing out on, but in reality, we also need money for day-to-day expenditures. Transferring money between your transaction account and an online savings account is not always feasible, as funds usually take a couple of days to clear. There is a way to get the best of both worlds, though - a cash management account.

A cash management account is a savings account linked to the transaction account you use every day. Money transfer is typically instant and fee free, and with internet access, you can easily manage your balance frequently to earn interest on all balances. Remember, once you build up extra savings, put it in an account earning the highest interest to achieve the best return.

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