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Term deposits versus savings accounts

Comparing options.

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Term deposits and savings accounts provide a secure way of investing your money and earning interest. 

Which one suits you depends on a number of factors. For example:  

  • How much you want to invest
  • How often you want to access your money
  • What interest rates you want to earn
  • Whether you want fixed or variable interest rates.

In this article, we compare term deposits and savings accounts so you can make a well-informed decision about where to put your money. 

Comparing term deposits and savings accounts

Why choose a term deposit?

As the name suggests, a term deposit is an account where you invest your funds for a specific length of time (or term). 

Features of term deposits: 

1. Fixed interest – term deposits come with a fixed rate of interest, with the rate depending on how much you invest and the term you invest for. This means you know exactly how much you will earn on your deposit. Fixed interest can also act as a buffer against changes in the economy which can vary interest rates. 

2. Security – investing in a term deposit is a low-risk secure way to earn income on your investment, compared to many other investment options (e.g. shares). 

3. No fees – term deposits generally don’t attract fees, providing you don’t withdraw your funds before the end of the term.  

4. Good option for beginners – a term deposit can be a good place for newbies to get started on an investment portfolio. 

5. Good discipline – if you’re a bit of a spender, putting your money in a term deposit can help keep a lid on your spending. 

6. No need for a large sum – you can usually start with a relatively small amount (such as $1,000). 

7. Great way to save for long-term goals – a term deposit is a great way to save for a specific long-term purpose, such as a home loan deposit. It can also be good just for tucking some money safely away so that you are not tempted to spend it. 

Since they are a fixed account, term deposits offer less flexibility than most savings accounts. For this reason, it’s wise to understand that your money will be tied up for some time, and to check your budget before starting your investment. 

What about savings accounts?

A savings account is like a regular bank account where you can make deposits and withdrawals. The difference is that it's designed to help and encourage you to save. 

Features and benefits of savings accounts: 

1. Higher interest – savings accounts generally offer higher interest rates than regular transaction accounts. This is usually subject to conditions, such as a minimum deposit amount and/or limited withdrawals per month in order to qualify for interest. However, the interest rate is often lower than a term deposit and varies over time.  

2. Compound interest – with a savings account your interest is usually calculated at regular intervals and compounds as you increase your balance.

3. Flexibility – savings accounts offer flexibility so you can top up your balance whenever you wish and access your funds when you need to. However, remember that withdrawing your funds may lead to not getting the full benefit of the higher interest rates. 

4. Great way to save – a savings account can help you save up towards short- or longer-term goals. 

5. Great starting point – a savings account allows you to get started on building a savings portfolio. 

6. Good for kids – savings accounts can provide an opportunity for younger people to get started with a savings plan. 

If you do decide to invest in a savings account, it’s important to understand the conditions. For example, if your balance goes too low, your account may revert to minimum interest rates. 

Unlike with a term deposit, savings accounts may also be subject to fluctuations in variable interest rates. 

Australian Government Financial Claims Scheme

It may also give you peace of mind to know that the Australian Government Financial Claims Scheme applies to deposits held in savings accounts and term deposit accounts with  an Authorised Deposit-taking Institution (ADI) such as a bank, credit union or building society. Under the Financial Claims Scheme, the Government will guarantee deposits up to a total amount of $250,000 per account holder.

Which one will you choose?

Both types of accounts have different benefits and conditions. The important thing is to be fully informed of these before making a decision based on your personal circumstances on where to invest your money. 

This article is intended to provide general information of an educational nature only. It does not have regard to your objectives, financial situation or needs and must not be relied upon as financial product advice. Before you act on this information, you should consider whether it is appropriate for your circumstances. Information in this article is current as at the date of publication. Applications subject to approval and fees and charges are payable. Terms and conditions apply and are available on request.

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