For money you can’t afford to lose, a bank account is usually the safest home. Here’s how term deposits and high-interest savings accounts work, and how to get the most from your cash.
When interest rates rise, savers benefit. The two most popular places for cash are term deposits and high-interest savings accounts. Both are low risk, but they work differently.
Term deposits
With a term deposit, you lend a sum of money to a bank for a fixed period, from one month to five years, at an interest rate that is locked in when you open it.
The rate won’t change during the term, even if the Reserve Bank moves the cash rate. That’s good if rates fall, but means you miss out if they rise.
Your money is tied up until the term ends. Most banks require notice, often 31 days, if you want to withdraw early, and may reduce the interest you receive.
When the term ends, many banks automatically roll the money into a new term deposit, sometimes at a lower rate than they offer new customers, so it’s worth checking options before the maturity date.
High-interest savings accounts
A high-interest savings account pays a variable interest rate, which banks can change at any time, usually after a change in the cash rate.
You can usually withdraw money whenever you want, which makes these accounts popular for emergency funds and savings goals.
Many advertised rates are made up of a low base rate plus a bonus rate. To earn the bonus, you might have to deposit a minimum amount each month, make no withdrawals, or make a certain number of card purchases from a linked account. Miss a condition, and the rate can fall sharply for that month.
Some introductory rates also only last a few months before dropping.
Your money is protected
Under the Financial Claims Scheme, the Federal Government guarantees deposits of up to $250,000 per person, per authorised bank, building society or credit union. That covers both savings accounts and term deposits.
How to choose
Many people use both: a savings account for money they might need at short notice, and term deposits for money they won’t need for a while and want to lock in at a known rate.
When comparing, look at the actual rate you’ll earn after any conditions, not just the headline figure.
Interest earned is taxable income and must be included in your tax return. And because inflation reduces what money can buy, cash savings can lose value in real terms when interest rates are lower than inflation.
For larger amounts or long-term goals, such as retirement, cash usually grows more slowly than shares or property, but it doesn’t carry the same risk of falling in value.
