Savings accounts vs. term deposits
If you want to save money and earn interest, savings accounts and term deposits are both worth looking into. We’ve examined the differences and similarities between the two to help you make an informed decision about which option best suits your needs.
What is a term deposit?
A term deposit is a secure way of investing a sum of money and earning interest. You’ll generally earn a higher rate of interest than with a transaction account, and the interest rate remains fixed for a set period of time. This could benefit you if the official cash rate decreases during your term deposit period.
Also, because only Authorised Deposit-taking Institutions (ADIs) can offer term deposits, the Australian government guarantees deposits of up to $250,000 so your money is very safe.
Opting for a term deposit could help support your savings goals by keeping your money locked away while it accrues interest.
On the other hand, term deposit accounts often don’t have as high a return as savings accounts, and they can be less flexible. If you want to access your money before the deposit matures, you may have to pay a significant penalty.
What is a savings account?
A savings account is a bank account set up to grow your savings. There are a range of options when it comes to savings accounts, each with slightly different features. Like term deposits, savings accounts typically offer higher interest rates than transaction accounts.
Your money is available to you if you need to access it – however, some accounts may have added incentives for regular deposits and disincentives for withdrawals.
Unlike term deposits, the interest rate on savings accounts is not fixed, so changes to the official cash rate could impact your return.
How to choose between the two
Whether you choose to put your money into a term deposit or savings account will depend on your individual circumstances and goals.
A term deposit may be a sensible choice if you’ve found that having your savings easy to access leads to temptation and spending. It may also be suitable if you won’t need to access the money for a set period of time and you’re looking for a no-risk option where you can guarantee the interest rate and return.
On the other hand, savings accounts can offer compound interest – so you’re earning interest on your interest, instead of interest at the end of a set period. If you’re able to let your money sit without touching it, the overall return may be higher.