The Difference Between a Savings Account and a Term Deposit

Depositing cash in a savings account or a term deposit are the most common ways to invest your money. But, how do you know which is right for you? 

First, let us explain their main differences and impact on your money.


What is a savings account?

A savings account is adeposit accountheld at a bank or other financial institution that earns interest.

Benefits

  1. Easy access to your money at any time, while the remaining balance earns interest.
  • You can save more by depositing more at any time.
  • Savings accounts are eligible for the Australian Government’s Financial Claims Scheme, which protects against the failure of an authorised deposit-taking institution (ADI) (such as banks or credit unions). The government guarantees deposits of up to $250,000 per account-holder per ADI.

Downsides

  1. You may need to link your high-interest saving account with a transaction account to meet certain conditions, such as depositing a minimum amount every month or limiting your withdrawal frequency.
  • As interest rates can vary, your earnings will also fluctuate.
  • You may be tempted to spend more given the easy accessibility of funds.

Fees

Most banks do not charge a savings account fee; however, some may charge an account keeping fee.

Possible Tax outcome

Interest earned is treated as investment income and taxed at your marginal tax rate. 

What is a term deposit?

A term deposit is also a type of deposit account held at a bank or financial institution, with money kept for a set period of time at a fixed interest rate. 

Benefits

  1. The interest rate is guaranteed and does not fluctuate.
  • You can invest in multiple term deposits of different terms and interest rates. For example, you can invest $15,000 in a 6-month term deposit earning 1% p.a. and $5,000 in a 12-month term deposit earning 1.50% p.a.
  • They too are eligible for the Australian Government’s Financial Claims Scheme.

Downsides

  1. If you want to access your money before the term finishes, you may be required to notify your bank at least 31 days prior, except under special circumstances.
  • If interest rates increase, you cannot benefit as your money is already locked away at a fixed rate.
  • Banks usually have a minimum balance requirement for a term deposit of approximately $1,000 to $5,000. It may be a considerable risk if you do not want to lock away that much of your savings or have just commenced your savings journey.

Fees

Banks usually do not charge any fee on a term deposit. However, if you want early access to your money, there may be an early withdrawal fee and loss of interest for the remaining term.

Possible Tax outcome

Interest earned is treated as investment income and taxed at your marginal tax rate.

Which is better for your needs?

Interest rates, accessibility of funds, and fees are key factors to consider. 

If you want a guaranteed income, term deposits are the way to go. However, if you want easy access to your money, use a savings account. Alternatively, you may keep some funds in a savings account for daily expenses or an emergency and invest the rest in a term deposit. 

Ultimately, the right decision for you will depend on your budget and financial requirements.

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