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?
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New research shows Australian households are tucking away an average of $409 each month. Record low interest rates make it essential to consider where your savings should be held.
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. The catch with many savings accounts is that your money is likely to earn a very low ‘base’ rate.
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.
At present, online savings account rates can hit 3 per cent, while the typical 24-month term deposit rate is 2.58 per cent, though I do see some at a fraction above 3 per cent. 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. That’s not a bad thing as it makes savers think twice before withdrawing.
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.