When it comes to storing and saving money, you’ve probably heard about both term deposits and savings accounts. While they might seem similar at first glance, they have some key differences that could make one more suitable for different financial needs than the other. This article walks through some basics of both options, highlights some of their main features, and seeks to offer a basic comparison.
This article contains information that is general in nature and is not financial or other advice. It’s simply a resource to help you understand some of the key differences between term deposits and savings accounts.
Understanding term deposits
A term deposit is a type of savings product where you agree to deposit a fixed amount of money with an authorised deposit-taking institution or “ADI” (e.g. a bank, building society or credit union) for a set period, known as the “term”. In return, the ADI offers you a guaranteed interest rate, which remains fixed throughout the term (unless you seek to withdraw your term deposit early). This means you can calculate how much interest you may earn by the time the term ends.
Some of the key features of a term deposit include
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Fixed interest rate: The interest rate on a term deposit is locked in when you open the account, so it won’t change, no matter what happens in the market (unless you seek to withdraw your term deposit early). This gives you greater certainty. Term deposits typically earn simple interest, meaning the interest is calculated only on the initial principal amount and doesn't compound over time.
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Locked-in period: Unless you seek to break your term deposit earlier, your money is tied up for the entire term, which can range from a few months to several years. During this time, you can’t add to the funds, and generally can’t access the funds before the term ends without incurring a penalty (unless you are suffering proven financial hardship).
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Early withdrawal penalties: If you need to withdraw your money before the term ends and can’t prove hardship, you may face penalties, such as losing an amount equivalent to some or all of the interest you would have earned. Some term deposit issuers may even charge additional administration or other fees for an early break, so be aware of the terms and conditions governing any term deposit you wish to take out.
When it might be suitable
A term deposit may be a good option if you’re saving for a specific goal and don’t need to access your money right away; for example, if you’re putting aside money for a future expense like a home deposit or a large purchase. Also, if you prefer the potential for a more certain, fixed return, a term deposit may be worth considering. It’s also a useful option if you prefer a more “hands-off” approach, where you don’t have to worry about monitoring interest rates or managing your funds actively.
Understanding savings accounts
A savings account is a type of account designed to help you store and grow your money over time. Unlike term deposits, savings accounts offer easy access to your funds, making them a flexible option for everyday banking and short-term savings goals.
Some of the key features of a savings account can include
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Variable interest rates: The interest rate on a savings account is usually variable, meaning it can go up or down based on market conditions and other factors. This can be a benefit if rates rise, but it also means any earnings might fluctuate. Most savings accounts provide compound interest, meaning the interest you earn is added to your balance, and future interest is calculated on this total.
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Accessibility of funds: One of the main advantages of a savings account is that you can access your money whenever you need it, subject to applicable fees and charges, withdrawal limits and/or any minimum balance requirements. This might be a suitable option if you want to keep your funds readily available for emergencies or regular expenses.
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Conditions: Some savings accounts come with conditions, such as maintaining a minimum balance to earn interest, making additional deposits to earn bonus interest, or limiting the number of withdrawals you can make each month. It’s important to be aware of these conditions to avoid any fees and charges, or missed interest.
When it might be suitable
A savings account might be suitable if you need flexibility and easy access to your money. For example, if you’re building an emergency fund or saving for something in the near future, a savings account allows you to grow your savings while still being able to withdraw from them whenever you need to. It may also be a suitable option if you want to add to your savings regularly, as you can deposit money into the account at any time, largely without restrictions.
Considering interest rates: fixed vs. variable
Term deposits
With a term deposit, you get a fixed interest rate that’s locked in for the entire term (provided you don’t break early). This means that no matter what happens in the market, the interest rate on your deposit won’t change if you leave your funds in place for the entire term. The advantage here is certainty—you should know exactly how much interest you’ll earn by the time the term ends. This makes it easier to plan your finances, especially if you’re saving for a specific goal and want to avoid surprises and don’t wish to be able to access the money early.
It’s important to remember term deposits typically offer simple interest, meaning the interest is calculated only on the principal amount and does not compound.
Savings accounts
Savings accounts, on the other hand, usually offer a variable interest rate. This rate can go up or down depending on factors such as market conditions or decisions made by the ADI. While a variable rate means you might earn more if rates rise, it also means your interest earnings are likely to fluctuate over time, and could decrease if rates drop.
Unlike term deposits, most savings accounts offer compound interest, meaning the interest you earn is added to the balance and you earn interest on that balance, which can fluctuate.
When choosing between a fixed and variable interest rate, it’s important to weigh up the pros and cons
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Fixed interest rate (term deposits): The main benefit is certainty. You’re largely protected from market fluctuations, which can give you peace of mind if you prefer knowing exactly what your return will be by the end of the term. However, if market rates rise, you won’t benefit from the higher rates since your rate is locked in.
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Variable interest rate (savings accounts): The advantage here is flexibility and accessibility. If interest rates increase, your savings account could earn more interest. But the downside is uncertainty—any earnings could decrease if rates fall, which makes it harder to predict your overall return.
Considering terms and conditions
Term deposits
One of the most significant things to be aware of is the penalty for early withdrawal. If you need to access your money before the term ends, and you can’t prove you need an early break due to hardship, you might face a reduction in the interest you’ve earned or, depending on the specific ADI, even have to pay administration or other fees or charges.
Additionally, most term deposits have a minimum deposit amount required to open an account, which can vary depending on the ADI. Once your money is locked in, there are usually no ongoing fees, but the early withdrawal penalties (and any other fees and charges on early withdrawal) are something to consider carefully.
Savings accounts
Savings accounts come with their own set of terms and conditions including, in some cases, fees and charges (e.g. for overdraws). Common fees could include account maintenance fees, which some ADIs charge on a monthly basis. Another condition to be aware of is the limit on the number of withdrawals or transfers you can make each month. Some savings accounts offer unlimited withdrawals or transfers, while others might limit you to a certain number per month, with additional withdrawals or transfers incurring a fee or charge.
Also, if your balance falls below the required minimum, you might earn a lower interest rate or be charged a fee. However, some fees and charges may be waived if you meet certain conditions, such as maintaining a minimum balance or making no withdrawals or transfers for a certain period.
Choosing between a term deposit and a savings account
Assess your financial goals, situation and needs
Are you saving for a specific purpose, like a down payment on a future home, or are you building an emergency fund that you may need to access quickly? Consider whether you need easy access to your money or if you’re comfortable locking it away for a fixed period. Also, think about your risk tolerance – how comfortable are you with potential changes in interest rates or the possibility of needing your funds unexpectedly?
Evaluate your saving habits
Another factor to consider is how consistently you save. If you’re someone who regularly sets money aside and avoids dipping into your savings, a savings account could offer the benefits of compounding interest over time. However, if you tend to withdraw from your savings often, or live paycheque to paycheque, a term deposit might be a more suitable fit. With a term deposit, your funds are locked away, reducing the temptation to spend and helping you build savings in a more disciplined way.
Consider your time horizon
If you’re planning to save for a short-term goal, a savings account might offer the flexibility you need, especially if you anticipate needing access to your money at any time. On the other hand, if you’re saving for something further down the road and don’t need immediate access, a term deposit can provide you with a fixed return over a set period.
Compare options
Interest rates, fees and charges, and terms and conditions can vary widely across products and ADIs, so taking the time to research can help you find the option that best aligns with your needs. Whether you’re considering a term deposit or a savings account, look at the terms and conditions each ADI offers, including the interest rates and how they are calculated, any fees and charges involved, and the terms and conditions that apply. This will give you a clearer picture of what each option entails and help you make an informed decision.
Exploring your options
As you consider whether a term deposit aligns with your financial goals, it’s worth noting that various ADIs across Australia offer term deposit products. Each provider may have different terms and conditions, including interest rates, eligibility criteria and fees and charges. To learn more about specific term deposit options, you can visit the websites of various ADIs or speak with a licensed financial advisor. Remember, it’s important to compare different offerings and consider your particular circumstances before making a decision.
FAQs
What happens to my interest if I withdraw from a term deposit early?
If you withdraw from a term deposit before the term ends, you might lose an amount equivalent to some or all of the interest you’ve earned depending on how long you’ve held your term deposit before you request an early break. Some ADIs may also charge other fees and charges on an early withdrawal, so it’s important to understand the terms and conditions before making an early withdrawal.
How safe is my money in a term deposit or savings account?
In Australia, both term deposits and savings accounts are covered by the Australian Government’s Financial Claims Scheme (FCS) up to $250,000 per account holder per ADI.
What is the minimum amount required to open a term deposit or savings account?
The minimum amount required can vary depending on the ADI and the type of account. Term deposits typically have a higher minimum deposit requirement than savings accounts, which often can be opened with smaller amounts.
How often do ADIs adjust the interest rates?
ADIs can adjust the interest rates on their savings products at any time, often in response to changes in the broader economic environment, market competition or the Reserve Bank of Australia’s cash rate.
What happens when my term deposit matures?
When your term deposit matures, you normally have the option to withdraw your funds, reinvest them in a new term deposit (in whole or part), or transfer them to another account. If you don’t take action, some banks may automatically roll your funds into a new term deposit, likely at a different interest rate (which may be lower or higher than your original interest rate).
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