Difference Between Savings Account and Fixed Deposit

If you have a bank account, you have at least heard of the terms 'savings account' and 'fixed account'. But which one is better? Which one should you get? Choosing how to save your money is a big deal. You don't want to be stuck with a product that doesn't suit your needs or end up losing out on interest. Being organised and thinking about what you need is the first step to a successful savings plan.

This article will go over why a fixed deposit is better than a savings account.

Let’s go over the basics first:

A savings account can be defined as a simple sort of financial instrument that enables you to deposit funds and receive a moderate amount of interest rates. These accounts provide a secure location for your cash while collecting a minimal amount of interest.

Savings accounts are available at banks as well as non-banking financial institutions. You don't need much money to create a savings account in any organisation, and you'll have simple access to your funds.

The main benefit of having a savings account in place is that it helps the account holder to keep cash separate from daily spending money due to its liquidity, reliability, and safety. These accounts are ideal for storing your emergency money or saving for short-term goals such as vacation or home maintenance.

The pros of a savings account include

1. Easy Fund Access
A savings account offers you high liquidity by allowing you to access and withdraw your funds at any given time. This can be an excellent option if you store your emergency fund in your bank and need immediate access to your cash.

2. Easy Availability
Saving accounts are the most basic type of instrument offered by banks and non-banking institutions all over the nation. So it is easily available.

3. Quick and Affordable Setting Up
Some bank requires a small amount to set up your saving account. If you have access to a limited amount of cash, you can easily set up a saving account.

The cons of a saving account include:

1. Lower Rate of Interest
While a saving account offers interest on your fund, the interest rate is usually very low. Since it is so low, chances are inflation may erode the amount of earned interest.

2. Minimum Monthly Balance
Several savings accounts have a minimum balance requirement. If the fund balance in your savings account falls below the statutory threshold, the bank can charge you a decent amount of penalties, wiping off the interest money you earned.

A fixed deposit (FD) can be defined as an investment product offered by banks as well as non-banking financial firms. People can invest a certain amount of cash in a fixed deposit for a pre-set length of time to get a pre-set rate of interest. This interest rate varies per banking institution, but it is frequently greater than the interest rate offered on savings accounts. These fixed deposits are offered for a wide variety of time periods, spanning from 7 days all the way up to 10 years.

A fixed deposit is one of the basic types of investment products that are available to the general public. Since they offer a higher interest rate than saving accounts, these accounts can be used to save up for a long-term goal or retirement.

The pros of a fixed deposit account include:

1. Flexible Term
You have the flexibility of investment tenure when choosing a fixed deposit account. As stated above, the terms on these accounts vary from a couple of days and weeks all the way to 10 years. A longer tenure usually comes with a higher interest rate.

2. Guaranteed¹ Returns
As one of the most basic and safe investment instruments, a fixed deposit offers guaranteed¹ returns after the maturity period, unlike equities. This is something you might consider if you have been accumulating money for a long time and may need it in the upcoming years.

3. Tax Breaks
Fixed deposit account interest is normally tax-free, making them an ideal alternative for persons who do not want to spend taxes on their investments.

The cons of a fixed deposit account include:

1. Limited Fund Access
A major disadvantage of fixed deposit accounts is that the account holder does not have direct exposure to the funds until the stipulated tenure ends. If you require the money earlier, you have to pay a charge. However, the amount you get may be lower than the amount you placed.

Here are the major differences between a savings and a fixed deposit account:

Here are why fixed deposit accounts are better than saving accounts:

1. Higher Rates of Interest
The fundamental motivation for making any investment, including banking product investments, is to earn a profit. When it comes to interest rates, the fixed deposit is a clear victory since the interest rates on fixed deposit accounts range up to 7-8%, depending from bank to bank or other financial institution to institution, while the interest rates on savings accounts are lower. Nevertheless, unlike savings accounts, you cannot easily remove funds from a fixed deposit account. However, fixed deposit returns will assist you in beating inflation, something a savings account cannot do due to its low-interest rates.³

2. Tax Breaks
Fixed deposits provide you with the combined benefits of high yields and tax savings, allowing you to watch your investment grow while also avoiding tax on your gains. If you hold basic savings account with any financial organisation, this does not apply to you. Therefore, if you complain about income tax getting deducted, a tax-saving fixed deposit can be your go-to investment product, and it also comes with no risk.

3. Disciplined Investment
Investment is all about discipline. While a saving account offers you much higher liquidity, a fixed deposit account holds your fund until the maturity of the pre-set period. This helps the accountholder realise the importance of disciplined investment. However, if you need immediate cash, you can get some of your money back in exchange for a penalty.

4. Loans
Some situations occur unexpectedly and need a large sum of cash. When you lack sufficient cash on hand, obtaining a loan appears to be your only option. You can make a loan application against your ongoing fixed deposit account if you hold an active fixed deposit account with any lender. Your loan balance will be equivalent to or somewhat less than the main principal amount of your fixed deposit. In this case, your fixed deposit serves as security for the lender.

5. Tenure Flexibility
A savings account gives you the freedom to withdraw your cash whenever you desire. When it relates to variants and customisation options, though, fixed deposit is the favoured alternative. This is due to the fact that fixed deposit has a range of tenures ranging from a week all the way to 10 years. The account holder is free to choose from the multiple tenure options in between. All of this while receiving a higher rate of interest.

A fixed deposit is a good choice if you are not in desperate need of your money but want to save for a rainy day or some other future purchase. It is much better than a saving account and will give you more money at the end of it. They are considered more secure, have better online and offline options, and have longer flexible terms. Saving accounts may be worth looking into, but they need to offer better interest rates to compete properly with fixed deposit accounts.