Savings Accounts VS Term Deposits: What is the difference?
Guest Post: William Jolly (previously posted on savings.com.au)
Savings accounts and term deposits are relatively low-risk products, especially given the government guarantees up to $250,000 of your funds with any ADI (authorised deposit-taking institution).
So, if you’ve got a lump of cash you want to tuck away without the threat of it plunging in value, a savings account or a term deposit could be good options for you. But which of the two is better suited to you?
The difference between a Savings Account and a Term Deposit
Interest rates on savings accounts are variable, not fixed, meaning providers can change them at will depending on external factors (like the cash rate increasing) or internal factors (bank profits down). This can be a good thing for savings account users in a rising interest rate environment, but in a falling interest rate environment, you may cop cuts to your bank’s interest rate.
Term deposit rates are fixed for the length of a term, so unlike savings accounts, you don’t experience either a rise or a fall in your term deposit interest rate – you get what you’re given.
How You Could Earn More Interest With Your Savings Account
Say you deposited $10,000 in both a savings account and a term deposit for two years, with both paying an interest rate of 2.50% p.a. At the end of this two years, the savings account will have earned you roughly $512 (assuming there were no interest rate changes), and the term deposit slightly less at exactly $500. Why is this?
The reason is savings accounts earn compound interest while term deposits earn simple interest.
With compound interest, the initial principal (the $10,000) earns interest as well as the previous interest earned. So you earn interest upon your interest. Term deposits typically earn simple interest, where interest is paid at the end of a specified term on the principal.
You’ll find that the bigger the investment the greater the difference between savings accounts and term deposits. For example, by depositing $50,000 instead of $10,000, the savings account in the example above will earn roughly $2,560 in interest while the term deposit earns $2,500.
Some longer-term deposits give you the option of earning fortnightly, monthly, quarterly, or annual interest payments – check out Savings.com.au for more detail.
Remember though: savings account interest rates are variable, and can therefore fall or rise at the bank’s discretion. Term deposits have fixed rates, so they don’t fluctuate.
NOTE: this article does not constitute financial advice – please speak with your financial advisor when making a financial decision.