Savings account vs term deposit: which is right for me?

Every sensible Aussie wants to save money, but the days of stashing notes under the mattress and in the biscuit tin are well and truly over. Now a phalanx of investment vehicles promise to grow your savings for you but choosing the right product for your hard-earned cash isn’t necessarily easy.

The two big options are the savings account and the term deposit. They work slightly differently and so you need to choose the right one for you and your plans and circumstances.

To make the right decision, you need to see a term deposit vs savings account showdown, featuring all the main things you should look at.

The interest rates

With a savings account, your interest rate will be a standard variable one, which means it changes with the cash rate. While many savings accounts offer good interest rates, they can fall as well as rise, depending on the base rate. One definite advantage of online savings accounts is that they often offer special introductory rates for new customers, so you’ll earn higher rates for up to the first 12 months. Head to a trustworthy comparison site to see which banks have special offers on.

Term deposits have fixed interest rates, so while your rate will stay steady when the cash rate falls, it’ll also stay steady when the cash rate rises. You’ll also find that the longer the term you choose, the better your interest rate is. Your rate will also go up with the amount of money you deposit. If you opt for a shorter term, your interest will be paid to you at the end, whereas with long–term deposit, you’ll most likely receive your interest annually.

You can choose to receive your interest as payments to you or have the interest reinvested into the term deposit.

Your term lengths

When you deposit your money into a savings account you can keep it in there for as long as you want. You don’t have to withdraw it unless you want or need to.

With a term deposit, you decide at the time you open it how long you’ll be keeping your money in it. You can have a term as short as one month or as long as five years. Anything shorter than 12 months is considered short–term and you’ll probably find the interest rates aren’t as high as those applied to deposits lasting for more than a year.

If you’re saving for something big, like a house deposit, a wedding or even your retirement, then a term deposit is a good vehicle as your interest is guaranteed at maturity as long as you don’t make any withdrawals.

Your fees

Most savings accounts don’t charge you any fees, especially online accounts. Some will do, however, so you should use a savings account comparison tool to sort through the accounts with the most suitable fee structures for you. Aim for one without fees, though, as the idea behind a savings account is to save as much as possible!

If you have a term deposit then you’ll probably not have to pay any fees either, but you’ll almost certainly be penalised if you withdraw any funds before the fund has matured.

About making withdrawals

You can withdraw money at any time from your savings account, but you may receive a lower interest rate for that month. Other penalties include fees for more than a minimum number of withdrawals. If you have a retirement savings account, you’re best advised to leave it alone and let it grow.

With a term deposit your money should stay put until maturity; if you do make a withdrawal, you’ll pay penalties which could be up to the entire amount of interest to date.

Minimum opening deposits

Almost all savings accounts don’t require a minimum deposit so you can start off small if necessary. Many people open savings accounts for their children, often with only a few dollars.

Term deposits do require minimum opening amounts and they’re usually quite large. The lowest you’ll find is $1,000, with several banks offering this option. Most require $5,000, with some asking for as much as $50,000 to get started.

Your ongoing payments

You can make as many payments into your savings account as you like and it’s a good idea to make extra deposits as they’ll all attract that lovely compound interest. Find out how much interest you could earn using our compound interest calculator. With some accounts you’ll be encouraged to deposit a certain amount in order to qualify for either your basic interest or a bonus rate.

Your term deposit won’t let you add any more money to it. At maturity, you can roll it over into another term and add more funds, but not before then.

Making that final decision

In some cases, it might be quite easy to make the final decision. If you don’t have the minimum amount for your preferred term deposit then you’ll probably have to go with a savings account. If this is you, then make sure you choose the highest interest rate possible.

If you do have the funds available and you know you’re a bit impulsive and that you may want to withdraw funds to go on a spree, then a term deposit probably is your best course of action because you might find the penalties discouraging.

You could always do both! If you put some money into a term deposit, there’s nothing to stop you from opening a savings account and squirrelling small amounts away in it. After all, you’re not expected to add any more funds to your term account once it’s up and running.

Having a diverse set of investment accounts is always a good idea because if the cash rate rises, your savings account will feel the benefit. Conversely if interest rates fall, the money in your term deposit is shielded and will carry on growing at its usual rate.

What’s really important, ultimately, is that you understand the features and functions of each type of account, and also of each individual account, so that you get the best performance possible from the options you choose.

Compare term deposit rates, fees and features from Australia’s major banks, credit unions and other financial institutions here.

Compare savings accounts from Australia’s major banks, credit unions and building societies here.

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