Savings Account or Term Deposit?
Australians with a good chunk of cash have several avenues of earning a return on their money. However, only some people are comfortable investing in stocks or bonds.
For individuals who prefer low-risk products, there are two options: a savings account or a term deposit.
Both share some similarities but also have glaring differences. Let’s look at how savings accounts and term deposit work, the pros and cons, and which one is appropriate for your specific needs.
What is a savings account?
A savings account is a bank account that allows you to deposit and withdraw money from the account while earning a variable rate of interest on the deposited money.
Depending on your lender, a savings account could offer a bonus interest rate each month when you meet certain conditions, e.g., depositing a certain amount of money and making no withdrawals. The interest on a savings account is compounded, meaning the interest from bonus offers you meet could earn interest on top of your rate.
But although you can withdraw funds, a savings account won’t typically come with a debit card like a transaction account. Hence, your funds will be less accessible.
What is a term deposit?
On the other hand, a term deposit is a product that lets you invest money for a locked period – could be 6, 12, or 24 months. During this time, your money earns at a fixed interest rate, and once the account matures, you earn the interest paid for the duration of the term.
The interest is paid monthly, yearly, or when the deposit matures and is not compounded as in a savings account.
And unlike a savings account, a term deposit locks in the money and you can’t access the funds until the term ends. But there are no ongoing monthly conditions to earn the interest rate like in a savings account.
Concerning the rates, term deposits have lower rates than savings accounts. Whereas the rates were higher three years ago, it’s just around 0.49% p.a. for a one-year term. Savings accounts have higher rates sitting at about 1% p.a.
How to decide between a savings account or a term deposit
Choosing between a savings account, and a term deposit depends on your financial goals, liquidity needs, and risk tolerance. Consider the following factors:
Immediate access to funds: If you need to access the money in the near future, a savings account is the better choice as you have frequent access to your balance when needed.
Higher interest earnings: If you have funds that you can afford to lock away for a fixed period, a term deposit can provide a higher interest rate at a fixed and guaranteed return. It’s essentially a set-and-forget account.
Monthly conditions: If you can meet monthly deposit requirements or spending conditions then a savings account suits you. But if you prefer capital preservation and a low-risk option, a term deposit is the safer choice.
Financial goals: Evaluate your short-term and long-term financial goals. Savings accounts are suitable for emergency funds or short-term savings with higher rates, while term deposits can be ideal for longer-term savings or investment plans.
Can I have a savings account and a term deposit?
Yes, you don’t have to choose one over the other; you can open both a savings account and a term deposit simultaneously.
With a term deposit, you can invest a portion of the money away without thinking about it, and then leave some of the money to be placed in a savings account so that the funds will be accessible any time.
Banks are required to withhold earnings for both these products. But the tax would depend on your overall income in that financial year.
When deciding between the two (or opening both accounts), you need to consider your budget, the type of investment you want, your goals, and what purpose you aim for with the money. Compare interest rates, fees, and terms – we can help you make an informed decision, especially with so much competition from lenders.
