Getting into the habit of saving money can be the factor that makes all the difference to your security later on in life. If you started saving up a portion of your pocket money when you were still in primary school then you’ll have seen early on in life how compound interest gives you what is essentially free money. If you’re looking for the best long-term savings account then you need to think about what you’re saving for exactly. By knowing what you’re saving for and how far away in the future it is, you’ll be able to look for and find the right sorts of accounts for your needs. And you can calculate how long it will take and how much you need to put away regularly to get to your goal. Not everyone has the time, the financial smarts or the ‘risk appetite’ for investment vehicles like stocks and shares. Bonds are useful, but also involve a certain amount of management. If you just want an account in which you can deposit your money then leave it to grow with the minimum of involvement, then you need to look at a high interest savings account or a term deposit. These two types of account work in different ways so they’re useful for different plans and aims. You might want a savings account if… You’re saving for something that doesn’t have a definite timescale. Whether you’re saving for a house deposit, or just for a rainy day, then savings accounts work well because… You have easy access to your funds With savings accounts, although you’re discouraged from accessing the money too often, you may be able to make a minimum number of withdrawals each month without being penalised. With an online savings account you can start the fund off with a tiny amount; some accounts have no minimum deposit so you can open an account with a single dollar! You can add to the account whenever you want. If you manage to squeeze in a bit of overtime, or you reduce your monthly phone bill, you can deposit this extra money as you like. You can earn bonus rates for good behaviour Lots of savings accounts give you extra interest for depositing a minimum amount each month and for making no withdrawals. Others offer a small bonus rate for opening and linking a transaction account with them. You often get good introductory interest rates You can essentially surf the best rates for savings accounts by keeping your money in an account for the higher interest introductory period then moving it. This involves some work, as you need to find accounts that won’t penalise you for withdrawals. You also need to stay on the lookout for accounts with bonus introductory rates. However, when you can find accounts like Rabobank’s Online Savings account, with 3.00 per cent on balances up to $250,000 for the first four months (the base rate is 1.55 per cent), it’s worth the effort to stay agile. There’s always a downside Of course, while savings accounts are great, there are some downsides that might make you think twice. You have easy access to your money You can get to your money fairly easily but there are interest rate penalties and of course you can’t save if you are spending your money. Your interest rate can vary The interest rates on savings accounts are variable; they can go up with the official cash rate (good) or fall with it (not so good). At the moment, interest rates are low so you’ll have to shop cleverly to get decent returns. If you worry about temptation, try a term deposit Term deposits work in a different way to savings accounts. They’re better for longer term campaigns as you don’t have the same access to your money as you do with savings accounts. In general, you’ll face stiffer penalties for early withdrawals which can be anything up to losing all the interest you’ve accrued. Term deposits are so–called because you deposit your money for a set term, usually from one month to five years, and then leave it there to grow. These accounts work well because… Your interest rate is fixed Your interest rate on your money is fixed on the day you open the account. This means that if the cash rate falls, your money will carry on growing at the same rate regardless. You can calculate exactly how much you’ll be getting at maturity, which makes for better planning. You’ll be less likely to dip into your savings The harsher penalties for withdrawals will probably discourage you from taking out any money before the account matures. This is important if you have longer term plans, like retirement. You can earn bonus rates Term deposits pay out interest monthly (for shorter terms like 12 months) or annually for longer terms like two to five years. Some banks will give a bonus rate for choosing annual payments of interest, rather than monthly or quarterly. A few providers offer a bonus rate for rolling over your term deposit into a new term. There are some drawbacks Just as with the savings accounts, there are some downsides. 1) Your interest rate is fixed This is great in a low interest climate, but if rates suddenly rise, you won’t benefit from them. 2) You can access your money but … While you can withdraw the funds in an emergency, you’ll lose some (or all) of your interest. 3) You can’t make additional deposits With a savings account, you can always bump up the balance a bit and as interest is calculated daily, your new dollars start working immediately. You can’t do this with a term deposit, so once it’s opened, everything’s fixed. 4) Making a decision There’s no such thing as one single best savings account with high interest as they’re all a little bit different. The same applies to term deposits. Work out how much interest you could earn using our compound interest calculator. You need to spend time with a savings account comparison site to see which accounts suit you best. It may be that a two–pronged approach of a fixed term deposit and a more flexible savings account will work best for you and your needs. The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.