Savings accounts offer slightly higher rates, but you have to work a bit harder to get them. Term deposits are dead simple: put the money there, forget about it, earn interest.
A term deposit involves locking up a sum of money for a term (usually for a few months or 1-2 years) and earning a fixed interest rate.
With a savings account you earn interest on your savings balance. But the highest interest rates require you to meet certain conditions, like depositing $500 each month.
A savings account is good if you're trying to build up your savings with regular deposits. A term deposit is useful if you already have some money and want to earn interest on it.
Savings accounts vs term deposits: What's the difference?
Savings accounts
You get a variable interest rate. It can change at any time, either up if rates are increasing, or down if rates start to fall.
You have to work harder to get a high rate. The highest savings rates on the market make you jump through a few hoops to get the max rate. This includes depositing a certain amount each month, or making no withdrawals.
Your savings are easily accessible. A savings account is not for daily spending, and you might lose out on bonus interest if you withdraw your savings. But they're not locked away, providing you access in an emergency.
Your rate is fixed. Whatever your rate is at the start of the term, it won't change until the term ends. It won't go down. But it won't go up either.
Set and forget. There are no conditions to meet with a term deposit. Just put the money there and forget about it until the term matures (comes to an end).
Harder to access your money. Some banks require a month's notice before you can pull money out of a term deposit. Other banks will give you your money faster, but you won't get any interest. A term deposit is really for saving money you don't need to access any time soon.
How do rates rise or fall? It depends on financial markets and regular decisions made by the Reserve Bank.
What's right for me: savings account or term deposit?
Here are some simple examples of different customers who could benefit from a term deposit or a savings account (keep in mind your own situation will be different and these are just examples).
I have a decent amount saved already and I don't want to worry about meeting bonus conditions or adding to my balance
A term deposit is great for people who aren't trying to grow their savings and want to earn interest in the simplest way possible.
I don't have much in the way of savings and I want to build my savings up each month
If you've got a job with regular income and you haven't got much money saved, you want a high interest savings account. You can put money in it each month to meet any deposit requirements and leave it there earning interest at a high rate.
I just want the highest possible interest rate
A high interest savings account will typically have a slightly higher interest rate, so look at these. But make sure you can meet the bonus rate requirements to maximise your interest.
I have some money saved but I may need to use it suddenly
A savings account will offer more flexibility here. It's very easy to move money out of a savings account.
You could consider a term deposit but check the account's conditions about early withdrawal. You may have to give 31 days' notice before getting your money.
Simple versus compound interest
Term deposits offer simple interest, while savings accounts use compound interest. You earn more interest when it compounds.
Simple interest. You deposit $30,000 for 24 months at a 4.00% rate. You earn $2,400 in interest, which is calculated once, base on the total amount deposited.
Compound interest. You deposit $30,000 for 24 months at 4.00% interest rate, compounded monthly. Every month the interest from the previous month is added to the deposited amount, earning slightly more interest. This happens every month. In 24 months you earn $2,494 in interest.
This means you can earn more interest with a savings account. However, it's hard to make an apples to apples comparison. Most savings accounts are for people who are adding money each month. A term deposit is better suited to someone who already has a chunk of savings and wants to earn interest in the easiest (or simplest) way possible.
Frequently asked questions
Savings accounts typically offer higher interest rates than term deposits, but this is because you have to meet some monthly account conditions. So while the rate is higher, it's a bit more work to get it.
Yes, you can have both a savings account and a term deposit at the same time. You might want to do this if you want to invest a portion of your money away for a fixed period, but keep some of your money in a savings account that's easy to access if you need it for emergencies or unplanned expenses.
Yes, banks are required to withhold tax on your interest earnings for both a savings account and a term deposit. The amount of tax depends on your overall income for the financial year.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio
Richard's expertise
Richard has written 562 Finder guides across topics including:
Alison Banney is the money editorial manager at Finder. She covers all areas of personal finance, and her areas of expertise are superannuation, banking and saving. She has written about finance for 10 years, having previously worked at Westpac and written for several other major banks and super funds. See full bio
Alison's expertise
Alison has written 625 Finder guides across topics including:
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