Term deposit vs savings account
Many of us set aside money for big life goals like going on holiday, getting married, putting a deposit on a house, or even an emergency fund in case of unexpected events. But with so many savings options available, choosing the right one for you can be confusing.
Two popular choices are term deposits and savings accounts. While both help your money grow, they cater to different needs. This guide breaks down their key differences to help you decide which is best for you and your financial goals.
Term deposit
What is a term deposit? They’re a low-risk, reliable investment option to grow your money. You lock away a lump sum of money for a fixed amount of time (the ‘term’) and in return you get a fixed amount of interest. When your term deposit matures, you receive your initial deposit plus the accumulated interest.
Advantages
Higher interest rates: Usually offer higher interest rates compared to regular savings accounts where you earn a fixed return on your investment.
Savings goals: Locks away funds, preventing impulsive spending and helping you reach savings goals.
Disadvantages
Limited access: In the case of unplanned emergencies, you usually can't easily access your money without penalty.
Fixed rate: If interest rates rise, you're locked into a lower rate until your maturity date.
Savings account
What is a savings account? They’re an easy way to save money while you earn interest. Some savings accounts may also reward you with bonus interest if you meet specific requirements (like not withdrawing your money for a month). The interest rates you earn typically move up and down over time.
Advantages
Flexibility: Easy access to your money for emergencies or unplanned expenses.
Variable rates: Potential to benefit if interest rates rise.
Disadvantages
Lower interest rates: Generally earn less interest compared to term deposits.
Temptation to spend: Easy access may lead to impulsive spending, hindering savings goals.
The key differences
Access to funds
With term deposits, your money is locked away for a fixed term (usually months to years) and early withdrawals typically incur penalties. A savings account offers easy access to your money whenever you need it.
Interest rates
A term deposit investment offers a fixed interest rate for the entire term, which is generally higher than savings accounts. A savings bank account offers a variable (changing) interest rate that can fluctuate with market conditions.
Flexibility
There is limited flexibility with a term deposit. You can't add more money once the term starts, and early withdrawal penalties apply. Savings accounts offer more flexibility as you can deposit and withdraw funds freely. Some accounts offer bonus interest for maintaining a minimum balance too.
Compare term deposits and savings accounts
Eligibility criteria may apply
Eligibility criteria may apply
Monthly account fees may apply
Limited (penalty for early withdrawal)
Fixed interest rate
Variable interest rate
Available in some circumstances
Compound interest
Compound interest
Early withdrawal fees may apply
Monthly account fees may apply
Standard Term Deposits: 39%
Up to 39%
Choosing the right option for you
With any investment decision it’s important to consider your savings goals, timeframes, and risk tolerance.
For short-term goals (like building an emergency fund), a savings account provides easy access and the ability to keep adding to your savings. For long-term goals, a term deposit can lock away funds and offer higher returns. If you have a larger amount of savings already, you could consider a term deposit laddering strategy to help you continuously build up your savings faster.
If you know you won't need your money for a set period and you’re comfortable with locking it away, a term deposit can be a good option. However, if you might need access then a savings account provides more flexibility to withdraw funds whenever you need them.
Tips to help you choose
Shop around: Compare interest rates offered by different banks and financial institutions for both term deposits and savings accounts.
Consider a mix: Maintain a savings bank account for easy-access funds and a term investment for long-term savings goals.
Set realistic goals: Choose an account that aligns with your specific needs and helps you achieve your financial objectives.
FAQs
Is a term deposit better than a savings account?
Whether a term deposit is better than a savings account really depends on your needs and goals. While term deposits usually offer higher interest rates and a fixed return, you also have limited access to your money and early withdrawal penalties if you need to break your term. On the other hand, a savings account offers flexibility to continually add to your funds and withdraw them whenever needed. However, they typically offer lower interest rates and having easy access may tempt you into making unnecessary purchases.
It's important to think carefully about your personal needs and savings aspirations. You might want to consider seeking professional guidance from a Financial Adviser to help you decide what’s right for you.
Should I invest instead of savings account?
Investing can potentially be a good way to grow your wealth over time, but it's not necessarily the right choice for everyone. While investing in things like stocks and managed funds has the potential to grow your money at a much faster rate than a savings account, there is always the risk that they can fluctuate in value, meaning you could lose money.
If you have a long-term time horizon and are comfortable with some risk, investing could be a good way to grow your wealth. However, if you need your money in the short term or are risk-averse, sticking with a savings account might be a better option.
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