Short vs long term deposits – what are the benefits and drawbacks?

Putting your money into a term deposit makes it much harder to access, so you can’t easily spend it on purchases. This could be handy for protecting the money you want to put aside for a savings goal, such as a home loan deposit, a flight to Europe, a car purchase or for your wedding.

Term deposits allow you to set everything in advance, including the amount of money you plan to deposit, the term length it will be invested for, and the rate at which you will earn interest on your deposit. Because these factors are all set in advance, you can calculate ahead of time exactly how much interest you could earn from a term deposit product. This eliminates a lot of the risk found with other types of investments such as property and shares, as you can calculate in advance the exact interest returns on your investments.   

Term deposits are also considered a relatively safe and practical option compared to other investments. While other investments could lose value or crash, losing you money, the funds deposited with an Authorised Deposit-taking Institution (ADI) in Australia are guaranteed by the federal government. So even in the unlikely event that your bank went out of business, you can claim your saved money back from the government, up to $250,000 per person per ADI.

A term deposit isn’t a particularly flexible option for saving money. Unlike savings accounts, you can’t ‘top up’ your term deposit with extra money whenever you choose – only when your term deposit reaches maturity and rolls over.

It’s also not easy to withdraw money from a term deposit. While this can help protect your cash from unplanned spending, if you do need to break a term deposit and access this money before the term is up, you’ll likely need to provide at least 30 days advance notice, and could miss out on part of the interest you would have earned.

Also, most term deposits earn you simple interest on your initial deposit amount, rather than compound interest like many savings accounts. While you can earn some interest income from your savings, you won’t earn interest on this interest unless you add it to your deposit amount when the term deposit reaches maturity and rolls over.

If you are considering investing your savings, but don’t want to tie up all your funds for a long period of time, you could consider a short-term deposit. These accounts let investors deposit and grow their money for up to 12 months.

Common short-term deposits are 30 days (1 month), 60 days (2 months), 90 days (3 months), 120 days (4 months), 180 days (6 months) and 12 months (1 year). Typically the longer the term the higher the interest rate, but this may differ between financial institutions.

One of the main benefits of a short term deposit is that you’re likely to have faster access to your money. This could be handy for if you want to keep your wealth secured but still somewhat accessible. Rather than applying a month in advance to withdraw your funds, it may be simpler to just wait for the deposit to reach maturity.

Many term deposits pay simple interest on the initial amount deposited, rather than compound interest like a savings account. But if you add the interest earned to your term deposit balance each time it reaches maturity, and you let it roll over for another short term, you may still be able to earn some interest on your interest, growing your wealth that little bit faster.

A term deposit product with a short term length may not offer as high an interest rate as a similar option with a longer term length. This may be because a bank is trying to encourage customers to deposit money with them for as long as possible, so it can be used to help provide other banking services such as loans. Plus, the longer your money stays deposited with a bank, the more interest it can earn over this time.

Choosing to roll your deposit over for multiple short terms could mean you aren’t guaranteed to keep the same interest rate and other terms and conditions each time. Banks and ADIs regularly update their credit and deposit products to suit the economic climate, and your old term deposit may simply no longer be available by the time its term draws to a close. Unless you switch to another term deposit offer, your money could roll over into a less favourable offer. Plus, regularly rolling over and/or switching short term deposits can require more time and effort from you, which may not appeal if you’re looking for a deposit you can ‘set and forget’.

Unlike short-term deposits which allow you to invest your money for a short period of time to get a quick (but often smaller) return, longer-term deposits will lock your funds away for a longer term, from one year up to 10 years.   

Longer term deposits may allow you to earn more interest than shorter term deposits. This can both be because of their longer term (the longer you keep money invested with any deposit product, the more interest you may be able to earn), and their generally higher interest rates (to encourage customers to keep their money deposited with the bank for longer).

Like other term deposit products, long term deposits aren’t particularly flexible when it comes to your savings. Because they don’t roll over as often, you may have fewer opportunities to access your cash, deposit more money, or to switch to an alternative term deposit option, at least without providing advance notice and potentially losing interest earning sand/or paying fees.

Your financial circumstances and Australia’s economic climate can also change quickly, and your long term deposit may soon no longer match your needs. For example, as Australia's inflation rate fluctuates over time, your long term deposit’s interest rate may not be enough to keep your money from effectively going backwards over the full term.

Whatever your savings goal, there are several options available to help you reach it, including term deposits and then following:

High-interest savings accounts

A big difference between a high-interest savings account and a term deposit is your ability to access your money and make extra deposits. 

Many savings accounts have strict conditions to earn interest at high rates, which may not be ideal if you’re making a lump sum investment. For example, you may have to deposit a minimum amount of money every month and make no withdrawals or you won’t earn interest at the higher bonus rate in that particular month.

Whereas with a term deposit, you deposit a fixed lump sum at an agreed interest rate for an agreed period. Unlike high-interest savings accounts, a term deposit locks away your money to help remove any temptation to withdraw your funds.

Transaction accounts

The humble transaction account typically offers little competition when it comes to saving. Transaction accounts usually earn little interest, if any at all. Because term deposits and high-interest savings accounts usually offer higher interest rates than transaction accounts, you can typically grow your money faster with these products.

Other investments

You could also choose to put your money into other investments, such as property or shares, to help keep it safe and earn a return. This could potentially work out well if you carefully manage your investments, as you may be able to earn higher returns and faster than with a savings account or term deposit.

However, every investment comes with risk. Properties, shares, crypto and other assets can all be volatile – they could rise or fall in value, so there’s no guarantee on the returns you could enjoy on your investments. And unlike term deposits or savings accounts, these investments are not guaranteed by the government, meaning you run the risk of losing everything if markets crash.