Should I choose a high interest savings account or term deposit?

Following five back-to-back official cash rate rises, savings accounts and term deposits are now offering higher interest rates than they had over the last few years, which is good news for savers. 

So how do you decide whether a term deposit or high interest savings account is the right option for you?  

A high interest savings account is a bank account that usually pays a higher rate of interest on your savings than other transaction accounts. They sometimes have minimum deposit requirements to open an account and can include bonus interest rates if certain conditions are met (such as depositing a minimum amount or not making withdrawals).  

The interest rate offered on this kind of account is a standard variable rate, which means it can increase or decrease depending on what happens with the market and interest rates.  

If the RBA continues to raise the official cash rate over coming months, this is likely to be passed on to high interest savings accounts in the form of higher interest rates, however if the rate lowers, high interest savings accounts will likely see their interest rates lowered too.   

A term deposit account is a type of savings account which offers a fixed interest rate for a set period of time (this can be between one month to 5 years). Your savings will be locked away for the term you select and you can’t add or remove funds in that time without financial penalty.  

The benefit of a term deposit is that it offers certainty with your interest rate, so if the market changes and variable interest rates decrease, your interest rate will remain locked for the length of your term. Conversely, if interest rates rise then you won’t see that applied to your interest rate until your term ends.  

If you don’t need to access your money for a period of time and want to earn a greater interest rate on it, a term deposit can often help you achieve that. This is especially true if you are worried you might be tempted to spend the money if it were held in a transaction account instead.  

The balances of savings accounts and term deposits are both part of the cash asset class, which is widely considered one of the lowest-risk asset classes. This is because it is backed by the federal government’s Financial Claims Scheme, which means in the unlikely event of your financial institution failing, deposits of up to $250,000 per account holder, per authorised deposit-taking institution will be guaranteed by the government.  

While cash is considered a low-risk asset class, it is also a low-growth asset class. Interest rates typically lag behind the rate of inflation, which means your money will be losing value over time. That said, it is still an important asset class to have in your portfolio alongside growth assets like property, stocks, or even commodities.  

How you choose to distribute your wealth across asset classes will depend entirely on how much risk you’re willing to take on. You may choose a more conservative portfolio which will contain a higher percentage of low-risk assets like cash and bonds, or you may choose a high-growth portfolio which will contain a higher percentage of higher risk assets like stocks and property.  

Speaking to a financial adviser can help you better understand how you should invest your wealth based on your values, goals, and risk profile.

How much of your wealth you choose to invest into cash depends a lot on your financial plans and goals for the next few years.  

For shorter term financial goals, financial advisers generally recommend keeping the money you will need in liquid assets like high interest savings accounts, term deposits or short-term bonds, as they are easy to access when required and generally hold their value during periods of market downturn.  

However, if your plans are longer term and you have time to wait out the market fluctuations, you may want to consider balancing your wealth across other asset classes as well. A good rule of thumb for investing is don’t invest what you aren’t willing to risk potentially losing.   

Term deposits and high interest savings accounts offer slightly different benefits, depending on whether your goals are short, medium, or long term.  

Setting short-term, mid-term and long-term financial goals can help you plan and stick to a budget and ensure you’re more likely to achieve the outcomes you’re aiming for.  

Short term goals 

These are usually accomplished in the next few months to a year. Short-term goals could include saving up an emergency fund, paying down debts, saving for a holiday, or even upgrading your car.

The best place to store your wealth needed to achieve these goals is in a liquid asset like cash. While term deposits can be used for this purpose, a high interest savings account allows you instant access to your cash at any time and may offer a better interest rate than a shorter-length term deposit.  

Medium term goals

These are goals you are planning to accomplish within the next one to five years.  

A term deposit can be a useful way to grow your cash for medium-term goals, but just keep in mind you won’t be able to add or withdraw funds during your term. 

Interest rates offered for term deposits are usually higher if your term is longer. As the interest rate is fixed, this will protect your interest rate over the term, even if variable rates decline during that time.  

Long term goals

These are for goals that are at least 5 to 10 years in the future. As longer-term goals are much further away, it can often make sense to invest in higher growth assets like stocks or property, as these have historically outperformed cash assets over the long term, and you have more time to recover from any market losses and benefit from market gains.

It is usually less beneficial to keep the bulk of your wealth in cash over the long term as cash loses value over time due to inflation (interest rates for savings and term deposit accounts usually lag behind inflation, meaning your money loses purchasing power over time). However, this depends entirely on how much risk you are willing to take on and whether you will need this money to live on in the future.  

It is strongly recommended to speak with a financial adviser before you make any big financial decisions to get advice tailored to your personal circumstances, values, and goals. This will help ensure you make the right decision for you.  

There are lots of useful calculators and guides that can help you plan your budget and calculate the interest you could potentially earn including:  

• National Seniors Money Manager’s Regular Savings Plan Calculator: This calculator can help you determine how much interest you will earn over the period of your savings terms.  

• Federal government moneysmart website’s Budget Planner: This tool can help you work out where your money is going to help identify areas you may be spending too much or not enough.  

• Federal government moneysmart website’s simple money manager tool: This is another useful budget tool that can help you visualise where money is coming in and going out. 

Sources: Moneysmart Source 1, Moneysmart Source 2, Moneysmart Source 3, Investopedia