Savings accounts vs term deposits

Fixed or variable, that is the question. For most people, savings accounts and their variable interest rates are the standard option. However, term deposits and their fixed rates offer their own advantages that make them worth considering. 

Let's compare the two across different factors.

Interest rates play an important role when deciding between a savings account and a term deposit. The RBA's cash rate affects the rates for both options, so it's important to monitor where these rates go.

Savings account interest rates

Savings account interest rates are variable, which means banks can increase or decrease the rate at any time - typically following changes to the official cash rate. This variability can work in your favour, as savings accounts often move ahead of term deposits when rates are rising.

Many banks offer competitive bonus rates if you meet certain requirements, while others tempt new customers with higher introductory rates that only last a few months. Just remember to check what the ongoing rate will be after any honeymoon period ends.

Term deposit interest rates

Term deposits come with a fixed interest rate that's guaranteed for your entire investment period. The more money you invest and the longer the term, you will typically receive a better rate.

For short-term deposits, you'll usually receive your interest at the end of the term. However, for longer-term deposits of a year or more, interest is typically paid at regular intervals such as monthly, quarterly or annually, giving you the option to reinvest it elsewhere.

One of the biggest differences between these two options is your ability to access funds.

With a savings account, you typically have the ability to withdraw funds whenever necessary. However, some high interest savings accounts may require regular deposits or limited withdrawals to earn the highest interest rate. Missing these conditions might mean you don't receive the bonus rate for that month.

Term deposits work differently: your money is locked away until the term matures. If you need to withdraw early, you'll likely face penalties. This lock-in period can actually be beneficial if you're trying to avoid the temptation to dip into your savings.

Most modern savings accounts don't charge fees, especially online-only accounts. Some traditional banks might charge setup fees or ongoing costs, but there are plenty of fee-free banking options available if you shop around.

Term deposits are often fee-free during the term. The main cost to watch for is the early withdrawal penalty, which is why you should choose your term length carefully.

When it comes to getting started:

• Savings accounts usually have no minimum deposit requirement
• Term deposits generally have minimum deposits from $1,000 to $25,000
• Some savings accounts require regular deposits to earn bonus rates
• Term deposits don't allow additional deposits during the term.

A savings account may be worth considering if:

• You want the flexibility to access your money anytime
• You plan to make regular deposits
• You believe interest rates will continue rising
• You're just starting your savings journey.

A term deposit might be better if:

• You have a larger sum to invest 
• You don't need access to the money for a set period
• You want guaranteed returns regardless of market changes
• You prefer a "set and forget" approach to saving.

Or you might use both - keep emergency funds and regular savings in a savings account, while locking away longer-term savings in a term deposit. This way, you get the best of both worlds: accessibility when you need it and better rates for money you can set aside.

At the end of the day whatever savings option you choose, make sure to take the time to compare the different savings accounts and term deposits hub pages to find the account that best suits your goals.