Savings Account or Term Deposit?

In planning for your financial needs, it is necessary to set aside money for your daily requirements and to store some money in a higher yielding deposit account. This allows you to build up capital for future investment in other financial instruments.

The deposit instruments most accessible to the average bank customer are term deposits and high interest savings account products. Each one has its place in your mix of deposits.

Term deposit

A term deposit requires you to place a certain amount for a set period; in exchange, the bank or financial institution agrees to pay you a fixed return on your money. The period may vary from a month to as long as five years. The interest yield is higher than ordinary savings accounts.

Term deposits for five years will earn higher interest than those placed for one month. Also, the bigger the amount placed in term deposit, the higher the interest rate you receive. Once you have opened the term deposit, you can no longer make additional deposits to it so you need a substantial amount to start one.

Term deposit is the way to go if you really want to save but find yourself unable to resist the temptation to use the money in your savings account. Since the money is locked in for the agreed period, it is inaccessible to you in the meantime. Of course, if you insist, the bank can release the money to you; be aware though that early withdrawal means you will forego the high interest rate.

If you wish to set up a term deposit, it will be prudent to get a clear idea of how long a period you can spare the money. This will help ensure that your money earns the desired high return but is locked in only for as long as you want.

High interest savings account

A high interest savings account is another way banks encourage you to save. There usually are conditions attached to the high interest savings account offer: at least one deposit but no withdrawals should be made within a given month in order to earn a bonus interest. There may also be a required minimum balance. If you don’t qualify for the bonus rate in a certain month, only the standard interest is applied for the month – and that is a very low rate. For example, the bonus rate is 3.01 per cent but the standard rate is only 0.01 per cent on the Commonwealth Bank Award Saver.

You need a sizable amount to open a term deposit, but you can start a high interest savings account with very little cash. The idea is for you to add more money into it every month without drawing any money from it. If you do need to withdraw, you lose a smaller amount of interest than from a term deposit and only for the specific month. With the high interest savings account, therefore, you have more flexibility than a term deposit.

Both types of deposit are good for you, but you’ll have to use them appropriately. When you have substantial cash to spare, a term deposit is the perfect way to make it grow faster during the period you don’t need it yet. When you have enough money left over from your transaction accounts but it is neither enough nor advisable for placement in a term deposit, the best alternative is a high interest savings account.