savings account Archives

The difference between a savings account and a term deposit

15 February, 20239 February, 2023 Updated on9 February, 2023 Education, Investing

Depositing cash in a savings account or a term deposit are the most common ways to invest your money. But, how do you know which is right for you? First, let us explain their main differences and impact on your money. What is a savings account? A savings account is a deposit account held at a bank or other financial institution that earns interest. Benefits Easy access to your money at any time, while the remaining balance earns interest. You can save more by depositing more at any time. Savings accounts are eligible for the Australian Government’s Financial Claims Scheme, which protects against the failure of an authorised deposit-taking institution (ADI) (such as banks or credit unions). The government guarantees deposits of up to $250,000 per account-holder per ADI. Downsides You may need to link your high-interest saving account with a transaction account to meet certain conditions, such as depositing a minimum amount every month or limiting your withdrawal frequency. As interest rates can vary, your earnings will also fluctuate. You may be tempted to spend more given the easy accessibility of funds. Fees Most banks do not charge a savings account fee; however, some may charge an account keeping fee. Possible Tax outcome Interest earned is treated as investment income and taxed at your marginal tax rate. What is a term deposit? A term deposit is also a type of deposit account held at a bank or financial institution, with money kept for a set period of time at a fixed interest rate. Benefits The interest rate is guaranteed and does not fluctuate. You can invest in multiple term deposits of different terms and interest rates. For example, you can invest $15,000 in a 6-month term deposit earning 1% p.a. and $5,000 in a 12-month term deposit earning 1.50% p.a. They too are eligible for the Australian Government’s Financial Claims Scheme. Downsides If you want to access your money before the term finishes, you may be required to notify your bank at least 31 days prior, except under special circumstances. If interest rates increase, you cannot benefit as your money is already locked away at a fixed rate. Banks usually have a minimum balance requirement for a term deposit of approximately $1,000 to $5,000. It may be a considerable risk if you do not want to lock away that much of your savings or have just commenced your savings journey. Fees Banks usually do not charge any fee on a term deposit. However, if you want early access to your money, there may be an early withdrawal fee and loss of interest for the remaining term. Possible Tax outcome Interest earned is treated as investment income and taxed at your marginal tax rate. Which is better for your needs? Interest rates, accessibility of funds, and fees are key factors to consider. If you want a guaranteed income, term deposits are the way to go. However, if you want easy access to your money, use a savings account. Alternatively, you may keep some funds in a savings account for daily expenses or an emergency and invest the rest in a term deposit. Ultimately, the right decision for you will depend on your budget and financial requirements. The information provided in this article is general in nature only and does not constitute personal financial advice.

Giving the gift of investing

2 September, 202126 August, 2021 Updated on26 August, 2021 Education, Investing

Did you have a savings account when you were young? It wasn’t uncommon and those old Passbook accounts funded many a first car. Now you’re a parent, are you thinking of opening an account for your kids? Record low interest rates have taken some of the fun out of watching bank accounts grow, but there are alternatives. For example, have you considered a share portfolio? Direct shares follow market movements, whether that be up or down, but over time, quality shares have greater growth potential than many other investment types. For a child’s investment fund, you’re probably looking at a savings term around 15 to 20 years – ideal for riding market ups-and-downs. How do shares and savings accounts compare? Consider the following example: Initial investment: $500Monthly contribution: $50Investment term: 20 years Assumptions: Savings account return calculated on 1% per annum interest. Share portfolio return 4% per annum based on a comparison of mixed Balanced Asset funds over the past three years to December 2020. This example demonstrates how shares, year-on-year, can potentially outpace a savings account. By year 20, your child’s projected Savings Account balance could be $13,899 and the projected Share Portfolio balance could be $19,450. Straight-forward? Not so fast, as there are a few other points to think about. Tax and TFNs Your child can have a tax file number (TFN) – there’s no minimum age. All funds will request a TFN, but whether you quote the child’s TFN or your own depends on a number of factors like who is contributing to the investment, whether the money is being used, etc. Tax is tricky too. Your child’s age and whether they’re earning their own money will determine whether they have an income tax liability and need to lodge a tax return. Additionally, there’s Capital Gains Tax (CGT). Share portfolios are assessed for CGT if the assets are sold for more than their purchase price. The amount of CGT payable will depend on a number of elements, but your tax agent will be able to assist. There will always be tax, but how much, what type and how it is calculated will depend on your, and your child’s, circumstances. Do your sums to work out the most suitable tax outcome for you and your child. Remember that mistakes can be costly so it’s wise to consult a tax accountant for personalised advice. Everyone’s situation is different and investment types and structures are not one-size-suits-all. Before making any decisions, seek the advice of qualified professionals, and regardless of whether you choose a share portfolio or an alternative investment, you’ll be across your options and confident that your particular needs are being met. The information provided in this article is general in nature only and does not constitute personal financial advice.