What's the difference between a savings account and a transaction account?

When it comes to personal banking, it’s important to choose the most competitive option for storing and accessing your money. 

Savings accounts and transaction accounts each have their share of benefits, though they may be better suited to achieving different financial goals. By learning more about these two account types, you can work out which one may best suit your needs.

A transaction account is your traditional, day-to-day bank account for everyday expenses. Many Australians have their salary paid directly into this type of account and use it to pay their bills. Your funds can be accessed via a debit card, and typically do not incur a fee for ATM withdrawals or electronic funds transfers. 

Most transaction accounts come features designed to make your everyday transactions smoother, including: 

• EFTPOS facility
• ATM access
• Internet banking
• Branch access
• Cheque books
• BPAY 

It will be up to you to decide which transaction account features and benefits may best suit your needs. Keep in mind that while some banks may charge fees on some or all of these features, there are also a range of zero fee options. If you’d prefer to avoid paying fees, you can use a transaction account comparison table to filter by account fees.

A savings account is a type of bank account in which the money you deposit accrues interest. 

Are you daydreaming of a tropical holiday, or budgeting for your wedding? Whatever your savings goals, a savings account is a relatively safe and simple way to watch your money grow. The longer you leave you money in a savings account, the more interest you may be able to earn. 

Savings accounts are different to transaction accounts as they aren’t designed for everyday use. Instead, savings accounts try to encourage good savings behaviour using withdrawal fees and monthly deposit requirements. They do not typically come with a debit card as banks want to discourage you from accessing this money for day-to-day expenses. 

When choosing a savings account, some of the features and benefits you may want to consider include: 

Competitive interest rate

Higher than average interest rates can help to put you on the way towards achieving your savings goals. A good rule of thumb is to look for a rate that is higher than Australia’s CPI inflation rate. This can help to keep your money from going backwards, though you’ll also need to consider the taxes on your interest income.

Bonus & promotional rates

Some banks will offer bonus and promotional rates as another savings incentive. With bonus rates, you can be rewarded with extra interest on top of your interest rate for following a set of conditions. These may include making minimum monthly deposits or making no withdrawals. Promotional or introductory rates are slightly different in that they are offered as a one off, higher interest rate to new customers and last a limited time, though they do not come with restrictions. 

Zero, or minimal fees

Some banks may charge fees on savings accounts, such as annual fees, ATM withdrawal fees or electronic transfer fees. But there are also zero fee options available, which can help keep your savings from being eaten away over time.

When it comes to transaction accounts vs savings accounts, one important similarity is that they are both guaranteed by the Australian government as part of the Financial Claims Scheme (FCS). Any money you deposit with an Authorised Deposit-taking Institution (ADI) in Australia is automatically covered by this scheme. This means that in the unlikely event that your bank went out of business, you’d still be able to access your money, up to $250,000 per ADI per person.

Any type of bank account can be a great way to help teach kids financial literacy and give them a head start in life. You can use bank accounts as educational tools to teach kids about income, budgeting, goal planning and overspending. 

Many banks offer transaction and savings accounts for children, often with great savings incentives. One benefit of a kid’s savings account is that they usually have a higher-than-average interest rate, though some banks charge additional fees to offset this. 

It is important to note that the Australian Taxation Office (ATO) imposes strict rules around children’s savings accounts to prevent tax evasion by parents putting their money in their children's accounts. Check their website to read these official rules before opening an account.

As well as transaction accounts and savings accounts, there are some alternatives choices available for taking care of your money:

A term deposit is like a savings account in that you can earn interest on the money you deposit. The more money you deposit, and the longer the term you leave this money in the account, the more interest you may be able to earn. 

One of the biggest benefits of a term deposit is the security and stabilty. Because you’ll deposit your money for a fixed term, and earn interest at a fixed rate, you can calculate in advance exactly how much interest you’ll receive from a term deposit. Because you can’t easily access the money, there’s less risk of accidentally overspending. Term deposits are also also guaranteed by the FCS. 

However, terms deposits are generally less flexible than savings accounts. When you take out a term deposit, you agree to leave the money with the bank for a pre-set term, which could be anywhere from a few months to five years. You may not be able to access this money before this term is up, at least not without providing plenty of advance notice (often a month is required) and possibly paying a fee. 

It’s also important to note that most term deposits earn simple interest rather than compound interest. This means you only earn interest on the initial amount you deposit, and don’t normally earn “interest on interest” like with a savings account.

Australians wanting to save their money and grow their wealth could choose to invest in a wide range of different assets. Potential investments could include shares, property, cryptocurrency and more. Each of these different investments have their share of advantages and disadvantages. Some, like property, have high upfront costs and may take some time to appreciate in value. Others, like shares, have lower upfront costs and quicker returns, but also higher volatility - there’s a real risk that you could lose everything if an investment goes bad or the market crashes. 

It’s also important to note that while investments can be useful for protecting your money and growing your wealth, they may not be as useful for making transactions. You’ll often need to sell an investment to access its value, and this may not be as easy or quick as visiting an ATM - for example, selling an investment property can involve months of dealing with real estate agents, solicitors and more.