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What’s the difference between a term deposit and a savings account?

Although there are a number of similarities between a term deposit and savings account there are also important differences.

Knowing how both options work could help you understand how each could help you at different stages of the savings journey. Here is a brief comparison of the main differences of term deposits and savings accounts.

What is a term deposit?

With a term deposit, you lock away an amount of money for an agreed length of time (the ‘term’) – that means you can’t access the money until the term is up. In return, you’ll get a guaranteed rate of interest for the term you select, so you’ll know exactly what the return on your money will be.

What are the benefits of a term deposit?

If you struggle with the temptation to dip into your savings, perhaps the biggest benefit with a term deposit is that your savings are locked away, so you can’t spend your savings on an impulse purchase.

 

The other major advantage is the certainty of a fixed interest rate. That means not only will you know exactly what the return on your money will be, but also, should interest rates move lower, you’ll still be locked in at the same rate of interest.

What about any downsides?

Of course there is a flipside to having your money locked away  for the agreed term- should you need to access your money sooner, you’ll likely have to pay a penalty fee and in many cases you’ll need to give up to 31 days’ notice. Therefore it’s important you’re sure you won’t need to access your money while you have it locked away in a term deposit. As your term deposit comes to an end, it’s also important to consider your options as some term deposits may automatically renew to the current rate at that time, which may be higher or lower.

 

Locking into a fixed interest rate can potentially have a downside - should interest rates go higher, you won’t be able to take advantage of a better rate while your money is locked in the term deposit.

 

Most term deposits will have a minimum balance deposit required, often between $1,000-$5,000. If you’re just starting to save, it could be hard at first to lock away that amount of money for a period of time.

What is a savings account?

As the name suggests, a savings account is a bank account designed for saving. Generally interest is paid on the money in the account while still giving access to the savings when needed. Some savings accounts may also pay bonus interest when certain conditions are met, such as growing the account balance by the end of the month. Savings accounts usually have a variable interest rate, so the amount of interest payable is likely to fluctuate over time.

What are the benefits (or downsides) of a savings account?

Perhaps the biggest benefit of selecting a savings account over a term deposit is being able to access your savings should you need to, while still earning interest. The flipside of course is having ready access to your money may leave the temptation to dip into your savings.

 

You can also add to your savings account whenever you like – either on a regular basis or when you have extra money to put in it. With a term deposit on the other hand, once you’ve made the initial deposit you won’t be able to add any more to the balance until the agreed term has ended. Also, unlike a term deposit, a savings account doesn’t require a minimum balance.

 

Some savings accounts also require a linked everyday account to access your savings. In some circumstances a service fee may be charged on the everyday account.

 

Savings accounts generally have a variable interest rate and depending on market conditions, the rate could go either higher or lower.  This will impact the amount of interest you can earn on the money in your account.

Things you should know

This information does not take into account your personal circumstances and is general in nature. It is intended as an overview only and it should not be considered a comprehensive statement on any matter or relied upon as such.