Congratulations – you’re sticking to your budget and you’ve got a savings plan. So now you want to see how you can make the most of your savings. In the article about getting your savings together, we talked about short or long term savings goals. The length of your goal can help you decide whether a savings account or a term deposit would be your best option.
But first, take a look at the key differences between a savings account and a term deposit.
Access to your money
Term deposits lock your money away for a period of time – that’s the “term” – and you can choose how long it is. It starts at a minimum of one month and can be as long as several years. So you need to be sure that you don’t need to get your hands on your money during the term you choose.
Savings accounts give you more access to your money. They let you take it out when you need or want it. But be aware that some accounts might reduce your interest if you withdraw too much or too often.
Savings accounts have variable interest rates, so they can change. Some rates are “introductory” so they’re only for a certain amount of time, then they drop to a lower variable rate. Read the fine print to see if and when the rate changes, and to what amount. Some savings accounts give you bonus interest if you don’t make a withdrawal or you make a minimum monthly deposit.
Term deposits offer fixed interest for the length of your term. So once you’ve opened a term deposit, if rates go down, your money isn’t affected because the rates are locked in. Usually the longer the term you choose, the higher the interest rate on offer (although it’s not always the case). It’s worth keeping an eye out for special interest rate offers, too.
Term deposits have a minimum amount that you need to start with – often it’s at least $1000. You can start a savings account from zero.
Savings accounts let you add more money whenever you like. Term deposits don’t. If you open a term deposit, it’s good to still have a savings account as well. That way you can keep adding to your savings and when you reach a certain amount, you can start another term deposit if you want.
If you’re still not sure whether a savings account or a term deposit is best, ask yourself a few questions. Are you an impulse spender? Would you rather not be? Do you have enough cash available to deal with an emergency (like a broken tooth, ouch) if all your spare cash is locked up?
If you’re starting your savings from scratch, obviously you’re not going to have enough yet to open a term deposit. So you can at least get the ball rolling with a decent savings account. Then you can make a term deposit one of your savings goals.
If you’ve got enough for a term deposit now, shop around for the best deal. The savings account finder website can help make this easier, but it’s not comprehensive so make sure you look around at different banks and building societies too.
If you’re really serious about making your money work harder for you, find out more on long term investment strategies by reading about asset management – getting the balance right.