Term deposits Vs savings accounts: What's best for you?

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Where should one stash their cash: savings accounts or term deposits? Andrea Sophocleous investigates.

September 7, 2009

Saving hasn't always been fashionable. Before the global financial crisis began taking its toll on years of economic prosperity and consumer hedonism, excessive spending was a national – in fact, global – pastime.

Australia may have escaped the full grunt of the GFC, but the new mood of thrifty restraint appears to be hanging around a little longer. This is the perfect environment in which to begin saving for that next rainy day or home loan deposit. And with interest rates set to rise further, so could your savings.

Higher interest rates won't just increase your mortgage repayments; on the plus side, they could also increase the interest you earn on your high interest savings account.

Savings accounts differ from day-to-day transactional accounts by being designed to help you save for a long-term goal. While you can access your everyday account for all your spending needs using debit cards, ATMs or the internet, any money you deposit in a savings account remains out of everyday reach and accrues interest on the growing balance.

You can make withdrawals whenever you like, but this would make a dent in the amount of interest you are paid. A more prudent option, therefore, is to make regular fortnightly or monthly deposits but no withdrawals.

A high interest savings account, however, is not your only option if you want to get serious about saving. If you are easily tempted into spending rather than saving, a term deposit may be a more suitable path for you to take.

Like savings accounts, term deposits are a low-risk, convenient way to earn higher interest on your money, but because you cannot withdraw any money during the life of your term deposit, your cash will remain safely tucked away, growing at a healthy rate.

Term deposits require a minimum opening balance – usually at least $5,000 – and can last anywhere from 30 days to five years. The rate is fixed for the duration of the term deposit, so you know exactly how much money you will end up with.

If you already have a few thousand dollars saved, a term deposit is a smart choice because you will start earning a decent amount of money in interest straight away. And if you won't need access to the money too soon, opting for a longer term makes more sense because depending on the term, you could score a higher interest rate.

For example, a 30-day term deposit with ING Direct will see you pocket interest at 3.25 percent p.a. , while a two-year term deposit will deliver a more profitable 6.00 percent p.a. interest. So $10,000 will earn $26.71 in interest in 30 days, while after two years your nest egg will be up by $1,200.

As with all financial decisions, shop around for the term deposit that suits your needs. And ensure you won't need the money before your term expires – otherwise you will have to wear the cost in hefty fees. If you are starting from scratch, a high interest savings account is a better option because most do not require a minimum opening balance.

The ING Direct Savings Maximiser account will dish out 4.75 percent p.a to new customers who signs up before November 30. This special introductory rate will last until 31 January 2010. Other generous high interest savings accounts include UBank's USaver account, which offers 5.11 percent p.a interest, and Westpac's Reward Saver with a 4.70 percent p.a rate.

There are hundreds of savings accounts to choose from, so researching and comparing interest rates and terms and conditions is essential.


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