In a low interest rate world, it’s important to think about the best place to stash your cash – a savings account or a term deposit?
New research shows Australian households are tucking away an average of $409 each month. That is pretty impressive though chances are many people are using their spare cash to pay off debt rather than grow savings, and it can be a sensible strategy. You’re likely to save more on interest charges than you’ll earn on your savings.
That said, it always makes sense to have a pool of savings for rainy day expenses or to grow cash for personal goals. Record low interest rates make it essential to consider where your savings should be held – not just to maximise returns, but also to make it easier to reach savings targets.
Savings accounts and term deposits are the most popular choices for cash investments, and both have their pros and cons. The key to making the most of the different features offered by both is to allocate savings across short, medium and long-term goals.
A high-interest savings account provides at-call access to your money, so it can be a useful option for short-term goals like purchasing some new furniture or appliances.
The catch with many savings accounts is that your money is likely to earn a very low ‘base’ rate. Strict conditions apply in order to earn bonus interest. You need to be sure you can consistently meet these conditions - be it depositing a minimum amount each month or restricting your withdrawals, to earn the top rate. Even then, the bonus rate may only apply for a limited time.
A term deposit on the other hand, may offer a marginally higher interest rate, and it’s definitely worth shopping around for the best return.
Along with a guaranteed rate, you can’t easily tap into your savings during the fixed period, which can make term deposits a good option for medium to long-term goals like saving for a holiday or some home improvements. Pick your term with care though as unwanted fees and interest penalties can apply if you need to access the cash before the full term expires.
At present, online savings account rates can hit 3%, while the typical 24-month term deposit rate is 2.58%, though I do see some at a fraction above 3%.
Savers may also want to consider a notice saver account. These are offered by a growing number of banks, and they act as a hybrid between a savings account and a term deposit. You’ll typically be asked to provide reasonable notice, often 30 days or more, before a withdrawal can be made. That’s not a bad thing as it makes savers think twice before dipping into their cash reserves.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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