Suppose you have $12,000 and three reasons to separate the money. Some of the money needs to be on hand for monthly bills. Some is for a rainy day, to be drawn at your discretion. The rest probably will not be touched for a while. Keeping it all in one account may look convenient, but each type of product is suited for a different purpose. Before choosing among them, it helps to break down that $12,000 into three buckets. Say, $3,000 for regular expenses, $4,000 to hold in reserve and be accessed as required, $5,000 for saving over several months or a year. Each one will need a slightly different product, as its specific role changes the key factors for you. For instance, spending funds needs easy access. The rainy-day funds require accessibility with no penalty, while those for saving long-term may accept the withdrawal conditions, for a set rate.
Current accounts are primarily for daily payments. In other words, the main functions are receipt of income and transfer for bill payments. It also supports bank transfers and debit cards. Interest will be absent or small. Fees, transfer and cash withdrawal limitations, as well as card payment fees can be significant. When looking at different current accounts, the focus should be on payment and fee convenience, and the current account shouldn’t be thought of as a savings account.
Interest bearing funds are typically held in savings accounts, where deposits and withdrawals are possible. Interest can vary according to balances and conditions. It can vary over time or be fixed, and interest calculations vary between financial institutions. Some use your daily balance, while others use your lowest balance for the time period, so if a savings account is advertised at 8% per annum, it needs to be understood that it could be calculated based on the lowest balance at any time during the period, so withdrawing funds early can result in no, or lower, interest at the end of the period.
The main function of a term deposit is to maintain the capital for a fixed time (say 6 months or 1 year), during which the deposit is locked. Early withdrawal may reduce accrued interest, cancel it entirely, or apply a lower rate. Interest is usually fixed but penalties apply, and additional deposits may not be possible. Often beginners consider the interest amount alone, so it’s important to check maturity conditions, capitalization, auto roll, and what happens if early withdrawal is made.
It isn’t just a question of choosing one account over the other, though often one account type is suited for one need. A plan can benefit by using multiple account types to serve different needs. So, before depositing anywhere, decide what funds will serve what purpose, and then look at what access they will need, when interest will be applied and how it is calculated, what are the account fees, are there any conditions to deposit/withdrawals, and when is the term maturity date? Then it’s easier to choose by looking at the product in relation to the job that the money needs to do.