Term deposits vs savings accounts: which one should I choose?

Both term deposits and savings accounts are protected by the government’s financial claims scheme, which protects deposits with authorised deposit-taking institutions (ADIs) up to $250,000. Which option is better for you will mainly depend on your personal circumstances; including your budget and cash flow, whether you have long- or short-term savings goals and your saving habits. We’ve explained some of the pros and cons below.

What is a term deposit?

A term deposit locks away your money for a period of time (the term), usually ranging from one month to five years. In return, you can receive a fixed rate of interest. It is generally considered a low-risk option. But they are not a ‘set and forget’ investment. At the end of the term, you can choose to withdraw some or all of your money. If you do nothing, your term deposit may automatically roll into a new term deposit. This new term deposit could have a lower interest rate than your previous one.

Pros

• Interest rates are fixed, so you have certainty about how much interest you will receive and you are protected if rates drop during the term.

• Most term deposits have no set-up or account fees.

• Your savings are locked away for the term, so you may be less tempted to dip into them.

Cons

• If you need to access your money before the end of the term, you may need to give a notice period and you may be charged a penalty fee.

• You generally cannot make additional deposits. Once you have made the initial deposit, usually you can’t add more to the balance until the term ends and you start a new term deposit.

• Most term deposits require a minimum deposit, usually between $1,000 and $5,000.

• If interest rates increase, you won’t be able to take advantage of this.

You may be interested in finding out what the best term deposit rates are. In our article about the best term deposits Canstar shows you which make the cut to help you to make your decision.

What is a savings account?

A savings account is a type of bank account that is designed for saving. You can add money into your savings account, while still having access to your money as needed. They are generally attached to an everyday transaction account. You can compare everyday transaction accounts on our database.

Many savings accounts offer bonus interest when you meet certain conditions, such as depositing a certain amount or making no withdrawals during the month. Some savings accounts also offer introductory or ‘honeymoon’ interest rates, which usually only apply for three or four months after you open your account.

Pros

• You can access your savings when you need to, while still earning interest.

• You can add to your savings at any time.

• There is no set term, so you can keep your money in the account for as long as you want.

• There is usually no minimum deposit required.

• Most savings accounts have no fees. But some transaction accounts charge account-keeping fees, which may be waived in certain circumstances.

Cons

• Interest rates are variable, meaning they can change at any time.

• If you don’t meet the bonus conditions, you are generally paid the standard variable rate only, which is generally very low. This rate also applies when the introductory period ends.

• You have easy access to your money, so you may be more tempted to dip into your savings compared to a term deposit.

You might also be interested in knowing what the best high interest rate savings accounts in Australia are, to help make your decision.

Term deposits vs savings accounts: How do they compare?

Here’s a summary of how term deposits and savings compare when it comes to interest rates, fees, accessibility and additional deposits.

Interest rates

Term deposits offer fixed interest rates, so you know how much interest you will receive. Savings accounts offer variable interest rates, so the interest you receive may change. To get the highest interest rate, you may also have to meet certain conditions.

Fees

Term deposits and savings accounts typically do not charge regular fees. But with term deposits, you may be charged a penalty fee if you decide to withdraw your money early. With savings accounts, the linked transaction account may charge account-keeping fees.

Accessibility

With term deposits, you cannot access your money until the end of the term. If you do decide to break your term deposit, you are usually charged a penalty fee and may need to give a notice period. With savings accounts, you can access your money as needed. However, the amount of interest you earn will depend on the amount of money in your account, so if you withdraw money you will earn less interest.

Additional deposits

You usually cannot add additional funds to a term deposit. If you want to invest more, generally you would need to wait for the term to end and then open a new term deposit with additional funds. On the other hand, you can add to a savings account at any time. This can be beneficial because the more funds you add to your account, the more interest you will earn. Some bonus savings accounts also require you to deposit a certain amount each month to get the bonus interest rate.

Whether you are leaning towards a term deposit or a savings account, it’s a good idea to compare your options. The difference between the highest rates on the market and the lowest can be considerable, so it can pay to find the best deal for yourself.

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