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

How does a term deposit work?

A term deposit lets you lock away a lump sum of money for a set length of time (the ‘term’). During this term you won’t have access to your money. However, in return you’ll get a guaranteed rate of interest. That means you’ll know from the outset exactly what the return on your money will be.

With a term deposit you won’t be able to make any extra contributions beyond the initial lump sum - once you’ve set up your term deposit you won’t be able to make any further changes to it until it reaches the end of its set term. When this happens (your term deposit ‘matures’) you can choose to reinvest your money into a new term deposit (either with or without the interest you’ve earned); you can choose to reinvest a different amount or have your initial deposit plus interest paid into a bank account so you can access it. 

Term deposits will generally give you the option of having interest paid monthly, half yearly, annually or at the end of the term (‘at maturity’). Keep in mind though that how you choose to have your interest paid is likely to affect the interest rate. 
 

Why choose a term deposit?

• Your money is safe – there’s virtually zero risk of losing any of your deposit. In fact, term deposits up to $250,000 with a recognised Australian financial institution (such as Bank of Melbourne) are guaranteed by the Australian government.
• You’ll know exactly how much you’ll earn – because your term deposit has a fixed interest rate, you’ll know what the return on your money will be before your term deposit is even opened
• It can help you resist the urge to splurge – if you’ve been saving for a while and are working towards a goal, putting some of your savings into a term deposit can remove the temptation to dip into your savings before you reach your goal.
   

Things to keep in mind

The biggest consideration for choosing a term deposit is not being able to access your money should you need to before the end of the term. If you do need to close your term deposit early, you won’t be paid the full interest you would have earned up to that point of the term and you’ll have to give 31 days’ notice unless you urgently need to access your money. It’s important therefore that you’re sure you won’t need the money during the length of the term.

There’s also a risk, when you lock in an interest rate, that you won’t be able to take advantage of a better rate should interest rates rise while your money is locked in the term deposit. Of course, should interest rates fall you’ll still be earning the rate you selected for the length of the term. 

It’s important you manage your term deposit when it gets close to expiry and consider your options as some term deposits may automatically renew to the current rate for that term – this rate could be higher or lower, depending on interest rates at the time.

Term deposits will generally have a minimum lump sum requirement of between $1,000- $5,000. If you’re just starting your savings journey, it might be a big ask to lock away this much money initially.

What is a savings account?

It’s all in the name. A savings account is a type of bank account designed specifically to encourage saving, generally by paying interest on the balance of the account. Unlike a term deposit, however, savings accounts let you access the money in your account when you need it. Savings accounts also usually have a variable interest rate, so the amount of interest you can earn can change over time as interest rates move.

Some savings accounts will also pay bonus interest when certain conditions are met, such as growing your account balance by the end of the month.
 

Why choose a savings account?

Probably the main benefit of choosing a savings account is the ability to access your money at any time should you need it. This of course is not so helpful though if you could be tempted to dip into your savings.

Another advantage of a savings account is being able to add to your savings over time – ideal if you want to set up a regular savings plan with regular transfers into your account. This is different from a term deposit, where once you’ve opened your deposit with an initial deposit you won’t be able to add any more to the balance until the end of the term.

You can also open a savings account without needing a minimum deposit. A term deposit on the other hand will require you to have a lump sum (generally at least $1,000 - $5,000) before you can open it.
 

Other things to keep in mind when considering a savings account

Unlike term deposits which have a fixed interest rate, savings accounts generally have a variable interest rate, so will be dependent on market conditions. That means if interest rates go down you won’t earn as much interest; of course, if interest rates do go up, you’ll be able to benefit from getting a higher rate.

It’s worth keeping in mind that some savings accounts will require you to have a linked everyday account in order to access your money and these can sometimes have a monthly service fee. However, in many circumstances it is possible to have this fee waived, such as having your salary paid directly into your everyday account.