Magical Penny continues the series on the specifics of saving money. This guest post considers the pros and cons of using savings accounts and term deposits.
Both a savings account and a term deposit account are easy to set up and manage or monitor online, and both are great, fee free, ways to earn high interest on your savings and investments.
However, which is best for you – a high interest online savings account, or a term deposit account? To help you decide here are a few pros and cons of each financial product, so you can learn more about the features and benefits of both options and choose one which best suits your particular needs, and your individual savings goals.
High Interest Savings Account
A high interest savings account is separate to your everyday transaction account and earns you a rate of interest which at least matches, if not exceeds the base rate. High interest savings account providers also often offer promotional or introductory rates to give your savings a boost from the start.
Pros of a savings account:
- A high interest savings account is an easy to use, flexible and at call account. When you choose the best savings account for your needs, you will have an account which lets you make unlimited deposits and withdrawals without penalty, and one which allows you to boost your savings with an extra deposit, or withdraw funds in an emergency. The funds in your savings account are not only earning a high rate of interest, but they also remain at call which means you can access them through online banking if you reach your savings goal sooner than expected or change your focus, or if you need to cover an unexpected expense.
- Your savings account will help you set up and stick to a regular savings plan. When you open a high interest savings account you can enter your savings target and the deadline for you to meet that goal. Your savings account will then track your progress and give you regular updates – sometimes even by SMS or email if you choose – to show you just how far you’ve come, and how close you are to reaching your goal. You can also set up automatic online transfers from your transaction account to your savings account to keep your savings regularly growing.
Cons of a savings account:
- Instant or almost instant access to your savings can increase temptation to spend. As your savings account funds are at call, you can instantly transfer them to your transaction account and they will arrive immediately if the account is with the same provider, and in a matter of days if you’re not. Therefore, if you think that this would be too much temptation to spend your savings on frivolous items, or before you reached your goal, then perhaps a high interest savings account is not for you.
- Your interest rate is flexible. The interest rate offered on savings accounts is high at the moment and going up because the official base rate is also on the rise. However, the interest earned on your high interest savings account is the bank’s standard variable rate and is subject to change at any time. Therefore, if you have a long term savings goal or are looking for the security of a high interest long term investment, you may prefer the guaranteed returns of a term deposit.
Term Deposit Accounts
A term deposit account is not the inflexible, high stakes investment which many people see it to be. A term deposit account can be opened for a term of between one month and five years in most cases and you often don’t need a minimum deposit either.
Pros of a term deposit:
- You have the choice of flexible terms and a range of payment and reinvestment options. Most term deposit accounts will not require a minimum investment to open the account and you can choose a term which best suits you – anywhere from one month to five years. You can also choose how your interest returns are paid for investments over 12 months and can have monthly, quarterly, six monthly or yearly returns paid to you as income. You’ll also have a range of reinvestment options offered to you before your term expires so you can ensure your savings continue to grow.
- The interest rate you will earn is guaranteed for the entire term of the investment. From the moment you choose your initial investment, the term of the deposit and the frequency of interest payments you will know the interest rate your investment will earn. That interest rate is then guaranteed for the life of your investment and will not change, not matter what else happens in the market.
Cons of a term deposit:
- To access your funds early penalties apply. A term deposit account may not be the right option for you if you don’t have an emergency fund, or you think you may need to access your investment early. A term deposit is able to offer you such high guaranteed rates because your funds are locked away for a determined period. Therefore, if you need to access your funds early you will be charged early exit fees, or you will earn a reduced rate of interest on your investment.
- The best returns are on long term, high value investments. If you have a significant investment to make in a term deposit account and can afford to leave it for the longest term then you can make substantial returns. However, for smaller, short term investments a term deposit is not always the best option and you need to shop around for the best interest rate for your term and investment amount. For example, if you are looking at a term deposit for six months and the interest rate is advertised at 6.00% you will really only be earning 3.00% interest because the advertised rate is a per annum rate and you are only investing for half the year.
This was a guest post written by Fred, an Australian personal finance writer. He offers tips and advice to help consumers to compare term deposits and the best credit cards offers online.
Adam is currently away learning to water-ski but will be back for the Wednesday blog update. If you are interested in writing guest posts for Magical Penny like Fred has, and think you can offer a fresh perspective I’d love for you to get in touch!
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Keep posting stuff like this i really like it
Savings Account is the best option for me at this time. Hopefully one I start making money, I can look into term deposits as an option. Thank you for the breakdown.
Keep posting stuff like this i really like it
That’s a nice overview of the two types of account. Personally, with the 12-month term deposit rate being so close to high yield savings, I’d go with the savings account.
@Kate -I agree, savings accounts are best for most people in their 20s because we’re not using cash to get us a return; rather we’re using it so its there when we need it.
@Pinyo- thanks so much for commenting. I love your blog and feeling a bit star-struck that you’re commenting here. You’re right that term deposits are not offering much better rates than instant access (although in the UK the rates are a little better than the states I think. For me though my cash deposits need to be liquid because that’s their purpose. Longer term money is invested in equities, which I can’t wait to start writing about here on Magical Penny -just wanted to get the basics in first as they are so important.
Great site. A lot of useful information here. I’m sending it to some friends!