There are several ways to grow your savings. Two of the most common are term deposits and savings accounts. Both products, which are offered by authorised deposit-taking institutions (ADIs), are protected by the Australian Government's Financial Claims Scheme for up to $250,000 per account holder, per institution. However, they have different advantages and disadvantages depending on your financial goals.
We’ve broken them down to help you make a more informed decision.
What’s the difference between term deposit and savings accounts?
What is a term deposit?
Term deposits, also known as time deposits, are fixed-term investments that generally offer higher interest rates because of their fixed nature. When you invest in a term deposit, you are investing a fixed amount, for a defined term, at a fixed rate.
What are some of the benefits of term deposits?
Generally higher interest rates. When it comes to choosing between a savings account or term deposit account, the interest rate could be one of the deciding factors.
Compared to savings and other transactional accounts, term deposits may offer and yield higher fixed interest rates. Generally, the more money you deposit and the longer your selected term is, the higher the term deposit interest rates.
Government protected and low maintenance. In Australia, term deposits with ADIs are covered by the Government’s Financial Claims Scheme meaning your money is protected for deposits of up to $250,000 per account holder, per ADI, should that ADI fail. The fixed rate also ensures that your money will still gain the same promised interest regardless of what’s happening in the economy (e.g. if interest rates fall).
Additionally, if you’re the type of investor who’s looking for a simple way to increase your money, term deposits are the way to go. Just lock your cash away at your selected term and rate, and it does the job for you.
No service or account-keeping fees. Term deposits don’t generally charge service and account-keeping fees. However, an interest reduction or equivalent adjustment may occur if you withdraw your money before the end of your term. Some ADIs also charge other fees for an early withdrawal.
Check the relevant ADI’s terms and conditions before you invest if you think you may need to make an early withdrawal.
Lock in your money. For people with impulsive spending habits, term deposits act similarly to a vault. Sure, you could withdraw your money early, but your interest or principal may be reduced. Leaving it in the term deposit can help curb bad spending habits.
Separates interest from capital. Visualisation matters when it comes to handling your finances and separating your income and expenses. Some providers allow you to open a separate account for your interest , which can be a convenient way to access your money without breaking the term agreement.
What are some of the disadvantages of term deposits?
In order to open an account, most term deposits require a minimum deposit and/or balance of somewhere between $1,000 to $5,000.
Unlike savings accounts where you can easily withdraw your money after achieving your savings goals, term deposits won't allow you to easily access your money. Additionally, unlike savings accounts where you can make regular deposits to grow your savings, you won’t be able to make any extra contributions to your term deposit account during the agreed, fixed term.
If you seek to wholly or partially terminate your account before your term deposit matures, your ADI may apply an agreed interest or principal reduction and/or an administration fee or charge in relation to the withdrawn funds. Check the terms and conditions for the product before investing.
Interest rates may increase while you are locked into your term because interest rates go up and down, all the time. If this happens, you might limit the amount of interest your investment is capable of earning (if it were invested elsewhere instead).
Depending on whether you choose to have your interest paid monthly, yearly or at maturity, your interest rate may differ.
What is a savings account?
As the name suggests, a savings account is a product designed to help you save. It allows you to put your money in a safe place while keeping it largely accessible to you. It usually comes with a debit card or passbook, depending on your preference, or what the ADI offers.
What are some of the benefits of savings accounts?
Keep your money accessible. They generally allow you to access your money easily via online transfer, debit payment or ATM withdrawals.
Add money any time you want. You can generally grow the savings in your savings account at any time by making additional deposits. There may be no limit to how often you can deposit money, although there may be daily limits on how much you can withdraw, or minimum balance requirements.
You may also wish to explore high-yield savings accounts, which could have interest rates comparable to term deposit interest rates. These accounts are typically found at online banks, neobanks and online credit unions.
Generally no or low fees. Many short- and long-term savings accounts don’t have fees.
What are some of the disadvantages of savings accounts?
While you’ll be able to easily access your money, some savings accounts have no or low interest. Check the terms and conditions for the product before investing.
If you want to earn higher interest other deposit products (such as a term deposit) may be more suitable.
Interest rates are variable and because interest rates go up and down, all the time, the interest you earn will change over time.
Some savings accounts come with fees and other requirements such as minimum balance requirements or daily transaction limits. Check the terms and conditions for the product before investing.
Additional considerations when choosing between a term deposit and savings account
Now that you know some of the differences between term deposits and savings accounts, as well as their respective benefits, we’ve compiled some other factors to consider before choosing between the two.
Term deposits offer fixed interest rates while savings account interest rates can vary depending on outside factors. Savings accounts may offer higher interest as an introductory rate, which usually only lasts for a short period. The same can be said for long-term savings account interest rates.
While term deposits and even the best long-term savings accounts in Australia won’t necessarily keep up with inflation, both accounts may soften the blow inflation can have on your buying power.
The term refers to the length of time you keep your money in an account. For term deposits, there’s a specific length of time before you can take out your money, lengths vary per institution. Check the relevant product’s terms and conditions before investing.
Savings accounts on the other hand have no maturity date. You can keep your money in that account for as long as you want.
Fees, expenses and other charges
Term deposits don’t usually have account-keeping or service fees and an interest or principal reduction and/or other administration fee may only apply if you choose to withdraw your money prior to maturity. Savings accounts fees vary per ADI, with some ADIs charging account-keeping and ongoing service fees. Check the relevant product’s terms and conditions before investing.
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