Which type of account should I put my savings money in?

Term deposit vs savings account

Saving money is important because having a cushion of funds can help you to weather financial storms, get educated, buy a house, expand your family and, when the time comes, retire in comfort.

Ideally, you should start a savings program before you’re born (or rather, your parents should do this for you…), but realistically, lots of us don’t start saving in any serious manner until we’re well into adulthood.

Nevertheless, the sooner you start, the more you’ll save especially if you choose a savings account with a decent rate of interest and you add money to it as often as you can.

Interest rates in Australia

Interest rates in Australia are low and getting lower which means you need to shop around to get a reasonable return so you’re not just locking money away just for it to stagnate.

There are still accounts available that are offering rates significantly above the inflation rate so have a look around at savings accounts before choosing one.

Not all savings accounts are the same

There are two common types of at-call savings accounts offered by Australian banks and credit unions.

1) Incentive savings accounts

Incentive savings accounts pay a bonus rate of interest if you meet their terms and conditions like: ‘Make at least $200 of deposits, with no withdrawals in a month.” If you don’t meet these rules, you will receive just the lower base rate of interest. 

2) Introductory rate savings accounts

An intro rate account may not have the same rules about deposits and withdrawals but they will probably only pay you the higher introductory rate of interest for the first few months after opening the account. Then you revert to the lower base rate.

For example, National Australia Bank (NAB) offers two at-call savings accounts for adults. One is an incentive type saver and one is an intro rate saver.

“At NAB, we have two popular products that help support Australians to save,” an NAB spokeswoman told InfoChoice.com.au, “the NAB Reward Saver and NAB iSaver,”

“Reward Saver allows customers to grow their savings faster with bonus interest for regular deposits and no withdrawals while iSaver enables customers to access their savings whenever they need them without impacting their rate.”

Saving accounts can’t do everything ….

Savings interest accounts offer much more interest than transaction accounts but you won’t have the same facilities as you do with your everyday account.

A savings account can accept deposits but probably has to be linked to a transaction account to make withdrawals. And withdrawals may be penalised with loss of bonus interest for that month.

You probably won’t be able to set up direct debits to pay bills from it or write cheques from it.

You won’t get an Eftpos card linked to the savings account and you won’t be able to access your money at an ATM.

What about term deposits?

Term deposits are ideal for you if have a lump sum of cash already and you want to keep it safe and growing at a reasonable rate of interest. It’s difficult to withdraw funds before the end of the term, so your money is protected from its greatest threat – your urge to spend.

Term deposit rates are fixed for the length of the term. You know what your balance will be at the end of the term before it begins.

you know you’re unlikely to withdraw your savings any time soon. These accounts are much less flexible than a savings account but they offer good interest rates that, crucially, are fixed. “Term” refers to the predetermined length of time your money is to stay in the account until it matures, usually from 30 days to five years.

There are no start–up or maintenance fees, so once you’ve hit upon your ideal account, all you need to do is to part with the cash. You will need 100 points of ID if the term deposit you choose is offered by another bank or credit union.

The disadvantages of term deposits

The same feature that makes term deposits attractive can also make it troublesome—the fixed interest rate.

If you fix your money for, say, five years and then the cash rate goes up by two per cent, you’ll still be stuck on your old fixed rate. There are no real signs of the base rate heading upwards for at least two or three years, though; if anything, it may come down further.

You can’t make new deposits to an existing term deposit once it’s up and running. With a savings account you can always deposit a few more dollars in here and there to bump up your returns. You lock in your money to a term deposit and that’s that.

You have to decide what to do with your money before it matures and make the necessary arrangements. If you just leave your term deposit alone, when it matures your bank might roll the funds over into another term (at a rate that could be lower than your existing rate).

You can open a term deposit with a little as $500 but most banks and credit unions ask for a minimum deposit of $1,000 and a few have a minimum starting deposit of $5,000. This caveat may make the decision for you.

Compare savings account rates from Australia’s banks, credit unions and other financial institutions at InfoChoice.

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

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.

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