Savings Accounts vs Term Deposit, what is the best fit for you?
We all want to build a solid savings account. Whether it be for the financing of a major purchase down the line or be it the building of an emergency fund to combat unforeseen emergency expenses, the decision to boost your savings is a sound option.
It would be safe to assume that many New Zealanders do have a savings account, are willing to save, and want to constantly build this fund. But, we tend to struggle to save, yes/no? This is a debate for another day; for more info here see https://nzcusouth.co.nz/saving-how-much-is-enough/). It would also be a fair assumption to think that many do not consider investment or the options for investment, NZ wide as a practical savings/growth method. Why? For a number of reasons; perhaps risk, accessibility, commitment or even a lack of understanding and financial understanding. All factors that will be highlighted as we look to find the best approach for you to get the best return possible.
Did you know that many investment options, namely term deposits offer interest rates far superior to that of your typical savings account?
Saving money is difficult. It would be advised to include savings as part of your budget, or better yet pay yourself first, before making other financial commitments. Prioritise savings. By that we mean diverting a portion of your income, come pay-day to your savings fund before accounting for all other costs, needs and wants. Easier said than done.
Saving money does not need to be complicated. We present some options for you so that your financial needs are met. So that the money you set aside serves is optimised, duly rewarding you. Whether a savings account, or a term deposit is the best fit for you, so that you can sit back and watch your hard-earned money grow, while staying in touch with your financial goals.
First up, what is a term deposit?
A term deposit is a form of investment paying interest. Where your hard-earned money is invested for a fixed term and you receive a fixed rate of interest over a defined period. Essentially, an opportunity for you to step back and watch as your money grows.
So what is the difference compared with a savings account?
Citing Investopedia “a savings account is an interest-bearing deposit account held at a financial institution that provides a modest interest rate.” Savings accounts are generally opened to keep money that you do not intend on using for daily or regular expenses.
At NZCU South we offer multiple savings accounts ranging from the Success Saver and Loyalty Saver through to the dedicated Christmas Saver which allows you to save for a period of time when many New Zealanders require access to funds the most.
When arranging your term deposit you are committing to setting your money aside for a fixed timeframe. Your investment will earn interest at the fixed rate agreed upon at the start of the investment period. The key to a term investment is that you will not be able to access your funds throughout the duration of your term, without incurring some form of penalty. Think carefully before undertaking this route.
Good things come to those who wait right? By resisting the temptation to spend now, instead putting your nest egg aside in a term deposit, you are presenting yourself an opportunity to meet future financial goals. It could be the purchase of a new vehicle, an overseas holiday or a deposit on a home loan. A decision to invest is a strategic one. One that rewards the patient, long-term planner and sets you on a path to achieve your long-aspired personal finance goals.
How committed are you?
Touching on the untouchable aspect of a term deposit, this requires a high degree of commitment. As stated previously, a term deposit tends to reward the patient investor. Generally, the greater the period of your term deposit (the time in which your fund is untouchable) the higher, the amount of interest you will earn. However, if you are likely to require access to your funds over a sustained period then the savings route may be more suited to your situation. Remember you will earn interest on your savings account, but, in general a term deposit will offer a greater interest rate and return on investment than the savings option.
Unlike a term deposit, a savings account gives you the flexibility and freedom to save and access your funds indefinitely.
When compared to other forms of investment NZ wide, (eg. share market) term deposits are guaranteed to provide you a return on your investment. With the set interest rate you will be able to forecast exactly how much you will earn, once your investment has reached maturity. A savings account is also a low-risk option. It could be assumed that the idea that a term deposit is a risker options, lies in the factors of accessibility and commitment – not true risk in a sense.
This here is where understanding is paramount – do your homework and investigate which option is right for you. What type of approach best fits you? And what approach will lead you to achieving your financial goals and aspirations faster and more easily.