Two of the more basic ways of earning a return on your money are through savings accounts and term deposits . These are both relatively low-risk products as even in the unlikely event that your bank goes broke, the government guarantees to give you back up to $250,000 in any disappeared funds. So, if you've got a lump of cash you want to tuck away without the threat of it plunging in value, a savings account or a term deposit are good options. But which is better? Savings.com.au has compared the differences and similarities between savings accounts and term deposits to help you make an informed decision, taking into account: Flexibility and stability Flexibility and stability First things first: What are they? What is a savings account? A savings account is a bank account that allows you to deposit and withdraw money and earn a variable rate of interest on it. Unlike a transaction account, savings accounts typically don't come with a debit or EFTPOS card, so the funds are generally less accessible. While you generally can't transact with a savings account, most allow you to transfer money in and out of it at any time. The table below features some of the highest-interest savings accounts currently available on the market: Time period 1 year Deposit amount Update results Update Compare Filters Bank Savings Account Base Interest Rate Max Interest Rate Total Interest Earned Introductory Term Minimum Amount Maximum Amount Linked Account Required Minimum Monthly Deposit Minimum Opening Deposit Account Keeping Fee ATM Access Joint Application Tags Features Link Compare Promoted Product Disclosure Judo Bank Judo Bank Personal Savings Account 0.05 % p.a. Bonus rate of 5.30% Rate varies on savings amount. 5.35 % p.a. $1,097 – $0 $249,999 $0 $0 $0 More details Compare ING ING Savings Booster (balance up to $500k) 2.25 % p.a. Bonus rate of 3.15% Rate varies on savings amount. 6.00 % p.a. Intro rate for 4 months then 5.40% p.a. $1,134 4 months $0 $499,999 $0 $0 $0 Go to site Compare Promoted Disclosure Rabobank Rabobank High Interest Savings Account (<$250k) 4.00 % p.a. 5.90 % p.a. Intro rate for 4 months then 4.00% p.a. $936 4 months $0 $249,999 $0 $1 $0 More details Compare Important Information and Comparison Rate Warning Important Information and Comparison Rate Warning Compare More Savings Accounts What is a term deposit? A term deposit is a product which locks away a sum of money on a fixed interest rate for a set period of time. Unlike savings accounts, most term deposits do not allow you to access your money before term without a fairly hefty cost. (See the 'fees' section below for more information on how this works.) They are widely regarded as "simple and safe" financial products. "The main reason a customer takes out a TD (term deposit) over other forms of savings is a 'fixed or guaranteed return'. With a TD, the customer knows exactly what return they will receive from a deposit the moment they put the funds in. Other investment vehicles can have a lot of variation and no guarantees of a return. Customers also like the simplicity of the product - I put in the money and can get my interest paid at maturity or monthly - and the process to establish, fund and manage a term deposit is very easy. At Judo Bank, we also offer a loyalty bonus if customers roll over their principal. In this way we are encouraging customers to save." Judo Bank general manager of operations & deposits Patrick Nolan Here's a selection of some of the highest term deposit interest rates currently on the market: Deposit term 6 months Deposit amount Update results Update Compare Filters Bank Term Deposit Interest Rate Interest Frequency Term Automatic Rollover Maturity Alert Early Withdrawal Available Minimum Deposit Maximum Deposit Notice Period to Withdraw Account Keeping Fee Online Application Joint Application Tags Features Link Compare Promoted Product Disclosure Judo Bank Judo Bank Personal Term Deposits - 12 months 5.35 % p.a. Annually 12 months $1,000 $1,000,000 – – Available for individual and joint accounts No application or monthly account fees Backed by an Australian Government Guarantee up to $250,000 Go to site Compare Promoted Disclosure Unity Bank Unity Bank Fixed Term Deposit - 6 months 5.15 % p.a. At Maturity 6 months $1,000 $1,000,000 – – More details Compare Hume Bank Hume Bank Term Deposit - 12 months 5.15 % p.a. Annually 12 months $10,000 $1,000,000 – – More details Compare Important Information and Comparison Rate Warning Important Information and Comparison Rate Warning Compare More Term Deposits Available for individual and joint accounts No application or monthly account fees Backed by an Australian Government Guarantee up to $250,000 Interest rates: savings accounts vs term deposits Historically, interest rates offered on both term deposits and savings accounts have been largely in step. Both products have featured rates strongly tied to the official cash rate as determined by the Reserve Bank of Australia. The graphic below charts the average savings account interest rates (both bonus savings and online savings accounts) against the cash rate since 2018. Term deposit rates have fared much the same. Below is an illustration of how three-year term deposit rates have tracked against savings account rates since January 2019. Differences between a savings account and a term deposit So, if the interest rates you stand to earn are roughly similar, what are the big differences between the two products? Here they are in a nutshell: Savings account Compound (generally calculated daily and paid monthly) Simple (generally paid end of term; more frequent payment options can come with lower interest rates) Can come with monthly maintenance or transaction fees - or no fees (product dependent) All come with early withdrawal fee as well as lower interest payment penalty Government guaranteed for deposits up to $250,000 Government guaranteed for deposits up to $250,000 Can deposit and withdraw freely, but this may affect bonus interest eligibility for some savings accounts Money is locked away for a set term and accessing it will result in lower interest earnings and, for some products, a notice period and a break fee Can come with apps that allow add-on features such as auto top-ups, budgeting options, linked accounts Some may feature loyalty bonuses for rolling over the deposit Let's look at them in more detail: Savings accounts Interest rates on savings accounts are variable , not fixed, meaning providers can change them at will. This can depend on external factors, such as the cash rate increasing or decreasing, or internal factors such as the bank wanting to boost its profits. Many savings account products offer bonus interest rates which you can earn by meeting specific conditions each month. These can include depositing a certain amount into a linked transaction account, growing the savings balance, limiting withdrawals from the savings account, or making a minimum number of transactions with a linked transaction account. Having savings in a savings account can be a good thing in a rising interest rate environment, but not so lucrative when interest rates are falling. See also : The different types of savings account interest rates On the other hand, term deposit rates are fixed for the length of the term so unlike savings accounts, you won't experience either a rise or a fall in your term deposit interest rate after you've deposited. In other words, you'll get exactly what you signed up for. Here's a look at the average term deposit rates for six-month, one-year, and three-year periods since 2018: Interest calculation One significant difference between savings accounts and term deposits is how interest is calculated. Savings accounts earn compound interest while term deposits typically earn simple interest . (Read more: simple vs compound interest .) In practical terms, you can earn more on your money if you're earning compound interest. Let's consider an example: Say you deposited $10,000 both in a savings account where interest is paid monthly, and a two-year term deposit, both paying an interest rate of 4%. After two years - assuming there were no interest rate changes - the savings account will have earned you around $831 while the term deposit will have earned $800. With compound interest, the principal (the $10,000 you initially deposited) earns interest and so does any interest you earn on it. That is, you keep earning interest on your interest. Term deposits typically earn simple interest, where interest is paid in one lump at the end of a specified term. Some longer-term deposits give you the option of earning fortnightly, monthly, quarterly, or annual interest payments although more frequent interest payments generally come with lower interest rates than an end-of-term payment. (We'll talk more about payment frequency in the Features section below.) So, why doesn't everyone just use savings accounts? The main reason is that the interest rate on savings accounts is subject to change at any time while term deposit rates stay the same for the specified time your money is deposited. Some depositors prefer the certainty of knowing exactly what their money is going to earn. As with most financial products, there are fees to consider and these can differ considerably from product to product. Savings accounts Most savings accounts don't charge any fees, but some may charge: Monthly account-keeping fees Monthly account-keeping fees Electronic transaction fees Electronic transaction fees Branch deposit fees Branch deposit fees Over-the-counter transaction fees Over-the-counter transaction fees According to Savings.com.au 's research, the highest monthly account keeping fee for a savings account is $6 (so $72 per year) although some accounts will waive fees if you deposit a certain amount each month or hold a concession or healthcare card. It pays to look for a fee-free savings account with minimal conditions for achieving its highest interest rate. Doing this can save you a considerable sum each year without you even having to think about it. Most term deposit providers don't levy fees. However, they will charge a penalty for early withdrawals , which can either be a flat fee or a tiered 'interest rate reduction' that effectively lowers your fixed rate depending on how long you had left in your term before you withdrew your deposit. Although the exact reductions will depend on your provider, it's not uncommon for returns to be cut like so:

Percentage of the term elapsed Interest rate reduction It could mean that by withdrawing your term deposit halfway through, you'd only earn an interest rate that's 40% of what you signed up for. This can be a far greater cost than any savings account fees. Stability and flexibility Both term deposits and savings accounts are generally safe places to store your money, as deposits with any institution on APRA's list of authorised deposit-taking institutions (ADIs) are guaranteed by the government on amounts up to $250,000. But while both options offer safety, they differ greatly in their flexibility. Savings accounts By all measures, savings accounts are far more flexible than term deposits. You can transfer money in or out of them at any time although, for some accounts, this could mean you might fail to meet bonus interest rate conditions. For most accounts, you can also set up automatic transfers in or out to help meet your savings goals. Some people may choose to deposit a portion of their salary into their savings account every month. If you're after flexibility, term deposits may not be for you. You can't withdraw from them without incurring a penalty and some require you to give up to a month's notice if you're intending to take your money. Making extra deposits is also not available with most term deposit products, so savings accounts are the clear winner when it comes to flexibility. But it's worth noting some customers prefer that lack of flexibility. Knowing that their funds are locked away for a set period can make them far less tempted to access them, given the harsh penalties that are attached. Term deposits are particularly popular with senior investors over 65 who don't mind exchanging flexibility for peace of mind and a stable return. See also: Savings accounts for Seniors Sometimes you might want a few bells and whistles when it comes to storing your cash. In most cases, it's savings accounts that come out on top here. Savings accounts Features on savings accounts can vary greatly between providers. In addition to offering bonus interest rates and little to no fees, a number of savings accounts allow for multiple linked transaction accounts, so customers can allocate money to different spend categories. For example, they can have one account for 'fixed' costs, like mortgage repayments , bills, and insurances while keeping another for everyday spending. As well, many savings accounts come with apps that let you see your balance and track your daily spending. Others may feature savings tools like 'automatic round ups' which automatically save small amounts from your daily transactions or allow you to set daily spending limits. Term deposits are pretty light in terms of features. They are, by nature, a very simple product - a 'put your money in and come back later' style product. But one feature that some term deposits offer is the option of different interest payment periods . For longer term deposits (usually more than a year), you can sometimes request to have interest paid: Even if you opted for more frequent interest payments on your term deposit, you're still likely to only be earning simple interest given banks don't usually allow the interest payments to be reinvested into the term deposit - preventing compounding. Also, in nearly all cases, providers offer lower interest rates in exchange for more frequent payments over the same set period. Savings.com.au's two cents On some counts, term deposits and savings accounts can offer similar benefits but are quite different products. The choice between them comes down to what you're looking to get out of your money. Below is the Savings.com.au verdict on which is the better product when all points are considered: Interest rates : a draw Interest rates : a draw Fees : a draw (although this depends entirely on whether you withdraw early from a term deposit or choose a savings account that charges monthly account-keeping fees or puts too many obstacles in the way of achieving a bonus interest rate) Fees : a draw (although this depends entirely on whether you withdraw early from a term deposit or choose a savings account that charges monthly account-keeping fees or puts too many obstacles in the way of achieving a bonus interest rate) Stability : term deposits Stability : term deposits Flexibility : savings accounts Flexibility : savings accounts Extra features : savings accounts Extra features : savings accounts When deciding between the two, you need to consider your specific requirements: your current budget, what your savings goal is, how much you can afford to put away, and how likely you are to need that money in the near future. It's also worth considering external factors such as whether interest rates are forecast to rise or fall. Putting money into a term deposit in a high-interest rate environment and accessing it again when interest rates are considerably lower can earn you more than a savings account would have over the same period. But even economists struggle to forecast these things accurately. At the end of the day, if you prefer having easy access to your funds while you're saving, a savings account will probably tick your boxes. Alternatively, if you're trying to meet longer-term savings goals where you want to remove the temptation to access your money, a term deposit may suit you better. When comparing products, finding a good interest rate is all-important. But so is reading the fine print on all the products you're considering so you're aware of early withdrawal charges, any fees that may be attached, and any conditions you need to meet to ensure you receive the highest interest rate possible. 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These rates are only examples and may not include all fees and charges. *For home loans, the comparison rate is based on a $150,000 loan over 25 years. *For car and personal loans, the comparison rate is based on a $30,000 loan over 5 years. Warning: these comparison rates are true only for the examples shown and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Monthly Repayment Figures Monthly repayment figures are estimates that exclude fees. These estimates are based on the advertised rates for the specified term and loan amount. Actual repayments will depend on your circumstances and interest rate changes. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. 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