Whether you’re saving for a home deposit, a holiday or something else entirely it’s important to know the difference between a term deposit and a savings account and how both can benefit different saving goals.

Let's take a look at some of the factors and features to consider when deciding what is right for you.

What is a term deposit?

A term deposit is a type of savings account where you lock away a set amount of money for a fixed period of time (the 'term') and receive a guaranteed interest rate so you know exactly what the return on your money will be. Once you've made the initial deposit you won't be able to add additional money to the balance until the agreed term has ended.

The minimum savings required to open a term deposit generally starts between $1,000 and $5,000 with the duration of the term anywhere between 1 month and 5 years.

The pros and cons

A term deposit is a great low risk option to grow your savings thanks to the security of a fixed rate. While your savings won't be exposed to interest rate drops, it also won't benefit from any interest rate rises under the fixed rate.

On the plus side, a term deposit usually has no set-up or account fees and will offer a higher interest rate compared to most transaction and saving accounts to compensate for your funds being inaccessible throughout the term.

Provided you don't need to access the funds while locked away, a term deposit can be a beneficial way to avoid the temptation of spending. If you do need to dip into the savings before the term has matured, 31 days' notice is generally required and less interest will be earned on the new lower amount.

Overall, the more money you put in to your term deposit or the longer your term is, the higher the interest rate will be.

What is a savings account?

Savings accounts are more flexible than term deposits, allowing you to save money in an easily accessible account separate from your everyday banking. Interest is paid on the money in the account, allowing you to grow your initial deposit while still giving access to the savings when needed.

The pros and cons

Savings accounts generally have a variable interest rate, so the amount of interest payable is prone to fluctuate over time. If market rates goes up or down, the amount of interest you earn goes with it.

Some savings accounts also require a linked everyday transaction account to access your savings. A linked account can allow you to easily transfer money between your accounts, so you can add to your savings after your salary or pension payment has been deposited or whenever you have extra money. This also means there's the added temptation to withdraw from your savings due to the easy accessibility.

While there are no fees to withdraw money from your savings account, some account-keeping fee may be charged on the everyday transaction account, or may require a minimum monthly deposit.

Overall, a savings account offers great flexibility and is an easy way to save for both short and long term goals.

Both term deposits and saving accounts offer different benefits and conditions but it all comes down to your personal circumstances and how you use your money. There are three key things to consider which may assist in helping you make an informed decision:

1. Your budget.

Are you able to lock a lump sum away for a period of time without touching it? If the lump sum of money forms part of your everyday budget and needs to be easily accessible for unforeseen circumstances then perhaps consider a savings account.

2. Savings goal.

Do you already have a large sum saved that you have not touched? Then a term deposit will provide you a better return on your funds. If your savings goal is to regularly add to your savings or create saving 'buckets' for fun and entertainment or household bills, then a savings account is the way to go.

3. Saving and spending habit.

You know yourself best. Are you likely to dip into savings or splurge on impulse buys? Then a term deposit will keep you money secure and allow it to grow. If you prefer to regularly contribute to your savings and love to watch it grow with each dollar you add then a savings account offers the ease of flexibility and accessibility.   

Get more out of your money with an Auswide Bank Term Deposit.

Or let us help you manage your day-to-day banking with our Everyday Accounts.

This information provides general advice only. We do not provide advice about this product based on any consideration of your personal objectives, needs or circumstances.

Published: Wednesday, 09 Mar 2022