If you have managed to accumulate some money, you will need a place to safely store it. And while it may be satisfying to stash it under the bed, this won't earn any interest so your money will be eroded by inflation.
Thankfully, if you want to keep it safe from theft or loss and protect against inflation there are two good options: term deposits and savings accounts. These are similar in some ways but quite different in others.
Let's have a look to see how they're different.
What is a term deposit?
Term deposits are a low-risk investment product where you deposit a sum of money for a fixed period of time (called the term) at a fixed rate of interest, and when the term is up you receive the interest on the lump sum.
Term deposits are a very basic product and are often compared to savings accounts because of this. They do have some key differences though which can make them more useful to different types of people.
Term deposits vs savings accounts: what's the difference?
Savings accounts function in a very similar way to term deposits: they're an account where you can store money and earn interest on that money. But unlike term deposits, savings accounts allow for much more than a single lump-sum deposit.
Many people choose to have their salary deposited into a savings account, and they allow users to make regular transactions between the savings account and an everyday banking account.
Term deposits vs savings accounts: interest rates
Interest rates are pretty low on both term deposits and savings accounts at the moment, and thanks to the first of several expected rate cuts, they're getting lower. Both products have interest rates that are strongly correlated to the official cash rate, and with the cash rate at record lows at the time of writing (June 2019), it's extremely difficult to find a permanent interest rate above 3.00% p.a. on either product.
Interest rates on savings accounts are variable, while term deposit rates are fixed. This means your savings account interest rate can be changed while your money is in there, but your term deposit's rate cannot be changed until your term has expired. Fixed rates can be both good and bad:
- It can be good when interest rates are going down, as you can avoid falling rates while yours is locked in;
- But it can be bad when rates are going up, as you can miss out on higher interest payments
It should also be noted that the interest on savings accounts compounds, while the same can only be said for a select few term deposit products. Compound interest earns more than simple interest over time, as the interest earns interest. If you deposited $10,000 in both a savings account and a term deposit for two years at an interest rate of 2.50% p.a, the savings account will earn roughly $512 in interest, and the term deposit slightly less at exactly $500.
So savings accounts probably just take the edge over term deposits when it comes to interest rates, but term deposits are probably a safer option in a low-interest rate environment.
Term deposits vs savings accounts: fees
As with the majority of financial products, there are fees associated with term deposits and savings accounts, but it's possible to pay no fees on either if you do your research.
Term deposits only really charge fees when you try to withdraw your money before the term is up. You could be charged an early exit fee, as well as an interest rate reduction that commonly varies depending on how far into the term you are.
Savings accounts, on the other hand, can come with the following fees:
- Monthly account-keeping fees
- Electronic transaction fees
- Branch deposit fees
- Over-the-counter transaction fees
These fees are becoming less and less common as consumers look to fee-free banking products, of which there are plenty. But there are still those who charge them, and savings accounts can still attract fees of more than $20 in some cases. Monthly account keeping fees are likely to be no more than a few dollars.
Term deposits vs savings accounts: safety and stability
This one is a tie, as both term deposits and savings accounts are protected by a Federal Government guarantee of $250,000. The government guarantee means up to $250,000 of your money is protected by the government if your financial institution collapses.
You could argue that term deposits are safer since the money is locked in, whereas savings account money is not, leading to the temptation to withdraw. But this is more of a weakness of the person holding the account, not the product itself.
Term deposits also have a fixed interest rate, which can be a good thing if interest rates drop. By locking in a higher interest rate prior to an interest rate cut, you can stay ahead of the curve with a term deposit.
Term deposits vs savings accounts: flexibility
This one isn't really up for debate - savings accounts are a much more flexible product by nature since they allow the account holder to deposit and withdraw money at any time or transfer this money to different accounts. Term deposits don't really allow top-ups or early withdrawals without penalty (although there are rare exceptions).
This isn't always a good thing. Some people might prefer the lack of flexibility in term deposits since they can be a method of 'forced' savings, but if you're after a flexible and adaptable place to stash your cash, then a savings account is really the way to go.
Term deposits vs savings accounts: extra features
Term deposits are also a very basic product and often don't have the fancy bells and whistles some people are after. In most cases, you put money in and get money out at the end, with a little bit extra thanks to interest.
Savings accounts can also be a very basic product, but it's becoming more common for them to have some cool features attached, like:
- Bonus interest rates if you meet certain conditions
- Automatic transfers to different accounts (internal or external)
- Automatic spending roundups to your savings account
- Spend tracking from a linked transaction account
- Innovative mobile banking solutions
- Goal setting and tracking
How do they compare to other investment options?
Savings accounts and term deposits are about as safe as investments come. Investing in other asset classes like bonds, shares or property may bring you higher returns, but comes with the caveat of increased risk.
So savings accounts and term deposits come with a trade-off: increased safety and secure returns in exchange for lower returns that are barely above the rate of inflation.
So should you choose a term deposit or savings account?
There's really no reason why you can't have both. Many people choose to have a healthy dose of cash as a part of their investment portfolio, in addition to some of those riskier investments mentioned above.
You can have most of your money in a savings account for easy-access with a smaller portion of it in a term deposit for safe-keeping, or the other way around. It just depends on how badly you need this money in the short-term, and if you're able to survive the term without it.
Just make sure you compare your options before choosing, and find one with a good interest rate.