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Term deposit vs savings account: what’s the difference?

Term deposits offer certainty and savings accounts offer flexibility. Here are some other common features and benefits of each.

Putting your money into a savings account, or in the alternative, a term deposit, are two common methods of saving. Working out whether either of these options are right for you depends on your personal and financial circumstances, as well as your savings goals.

To look at this simply, a separate savings account where your money is readily accessible might be useful for a shortterm goal. A term deposit, where your money may be tied up for a longer period of time in return for generally higher interest, could be a more suitable option for a longer term goal.

Term deposits

Term deposits work by locking your money away for a certain timeframe (or ‘term’) in exchange for a fixed interest rate return at the end of that term. A general rule of thumb is the longer the term, the higher the interest rate. Terms vary, but usually range from as short as one month to as long as five years.

They’re worth considering if you’re looking to get an exact amount by a certain date and don’t need to access the money before the agreed term ends.

Pros

  • There is more certainty involved with the return on term deposits than most savings accounts as the interest rate is guaranteed.
  • Usually, these accounts come with no setup fee. They often offer a higher rate of return to compensate for your money being out of reach for the entire duration of your term.
  • They’re a set and forget way of saving, so you don’t need to worry about fluctuations in the Reserve Bank of Australia’s (RBA) cash rate.
  • If interest rates fall during that time, you’re likely to do relatively well with a locked in rate.

Cons 

  • If the cash rate rises, you won’t be able to obtain the benefit of that increase for your term deposit.
  • Your money is locked away for the full term.
  • You’ll have to give notice to access it early, usually around 31 days.
  • You’ll have to pay a penalty fee or earn less interest if you take your money out before the end of the term.
  • A minimum initial deposit is required, which can vary widely.
  • There’s no option to top up funds once you’ve opened a term deposit.

Interest rates on term deposits 

With a term deposit, the length of the term has a corresponding interest rate. You can choose the term, or the length of time you want the account for and the amount you want to deposit based on your needs.

When should I open a term deposit? 

Term deposits can be useful when you’re looking for certainty about the rate of interest your money will earn. So, if your goal is to buy a car but you want to wait until the end of the next financial year to grab a bargain, you might plan for a term deposit that matures around then.

Savings accounts

Savings accounts are more flexible than term deposits. A savings account can be useful when you want to put your money away and have it earn some interest with the peace of mind that you can also access your funds as and when you need to.

Pros 

  • You can deposit or withdraw money at any time.
  • You may be able to link to an everyday transaction account.
  • Interest rates may rise, giving you a greater return on your initial deposit.

Cons 

  • Interest rates may fall, giving you less than you expected at the outset.
  • If you withdraw funds you may lose interest for that month, or whatever length of time applies to your account.
  • You may be required to make minimum monthly deposits to earn bonus interest rates.
  • You may need to maintain a certain balance to avoid any potential fees or loss of interest rate benefits.
  • Some savings accounts may limit access to money to encourage you to save, through no debit card or ATM access.

Interest rates on savings accounts

Standard savings accounts usually offer low fees and immediate access to your money but you may get a lower interest rate compared to a term deposit.

Interest rates are quoted per annum, applied as a percentage to the money you have in your savings account on a daily basis and credited monthly.

As the name suggests, high interest savings accounts typically have higher interest rates but there may be penalties for withdrawing your money before a set period of time has passed, or if you don’t meet the required number of debit card purchases or ongoing minimum deposit requirements.

What to consider before opening a savings account?

There are a number of things to consider:

  • fees charged
  • interest rates
  • how accessible your money is
  • whether you can set up an automatic direct debit
  • whether there’s a minimum amount you need to deposit each month.

There’s a variety of savings accounts in the market so use this checklist to help find the right savings account for your situation.

How fees compare 

Term deposits usually come with no setup fee. However, if you need to withdraw your money before the maturity date, you’ll likely have to give notice in advance of your withdrawal and pay a fee or earn less interest.

Some savings accounts attract setup fees and may also include anything from monthly account keeping fees to withdrawal fees. So, when it comes to comparing accounts, make sure you’re across any potential fees or charges your provider may apply to your account.

Source: AMP

 

Hardik Gupta

Senior Paraplanner

Education: Master of Business Administration (Finance & marketing) & Bachelor of technology (B.tech)

Hardik is a financial professional with an MBA in Finance and extensive expertise in financial planning. As a Senior Paraplanner, he brings a wealth of knowledge and a deep commitment to helping clients achieve their financial goals.

With significant experience in the financial industry, Hardik excels in creating detailed financial plans, performing comprehensive financial analyses, and supporting financial advisors with client portfolio management. His strong background in finance provides him with a robust understanding of market dynamics, investment strategies, and risk management, enabling him to deliver tailored solutions that align with each client’s unique needs.

In his free time, Hardik enjoys spending quality time with his family, biking, playing snooker, and exploring new culinary delights through cooking.

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Master’s of Commerce & Bachelor of Commerce

Mayank has 8 years experience in the Financial Services industry, with extensive understanding and in-depth knowledge of Financial Planning.

Mayank enjoys systems and numbers, ensuring that every step that needs to be followed gets done and every step that is unnecessary be removed from the process. Being an open, honest and naturally empathetic person, Mayank goes out of his way to ensure that clients, family and friends are happy and content. In his free time, Mayank enjoys spending quality time with my family, creating lasting memories with the people who matter most to him.

Another activity he enjoys is travelling – exploring new places and experiencing different cultures is something that excites him.

Jack Wyer.

Financial Adviser

Bachelor of Business – Major, Financial Planning

Jack Wyer is a Financial Planning Graduate who has recently commenced his Professional Year with Verity Wealth Solutions. With a Bachelor’s Degree in Business, Majoring in Financial Planning, Jack has demonstrated high achievement, receiving merit awards in both 2021 and 2022. Jack’s passion for helping others and his desire to see others succeed financially have been the driving forces behind his chosen career pathway.

Driven by his passion for financial well-being and his innate ability to connect with others, Jack is dedicated on making an impact on the lives of others. Through his expertise, empathy, and commitment, he strives to empower people to achieve their financial goals.

Alongside his financial planning endeavours, Jack finds joy in spending quality time with friends and family and wants to slowly visit new countries along the way. Jack is also an avid Soccer player, actively playing for a local team. When it comes to supporting a team, Jack goes for Tottenham in the English Premier League.

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