Term Deposits – Choosing the right savings option

Weighing up your savings choices

Weighing up your savings choices

When it comes to investing your money, it is generally true that higher the returns carry the most risk. Most investment options come with some element of risk, but if you don’t mind reducing your possible returns in exchange for a safe investment, consider term deposits.

Term deposits can be found in most bank and credit unions and are designed to provide savers with a guaranteed fixed rate for a fixed length of time. Because your money is locked away for the agreed term with no access provided to your money, these accounts tend to offer higher rates of interest than regular savings accounts. Another main difference between these accounts and your average savings account is that they normally require a high opening balance, so to you will need an initial investment if you wish to  consider this option.

If you require your money before the term deposit matures, you are likely to be charged penalty fees. Terms range from as low as 7 days, up to 7 years, with different rates offered for different bonds, making these investments short to medium range. The rule seems to be that the longer amount of time your money is deposited for, the higher the rates offered.

By fixing your rate for a specified term you are able to protect your return from declining or volatile interest rates, while guaranteeing a predefined return on  your investment. On the flip-side, this could also work against you, as increases in interest rates could also occur during the fixed term, which gives us our risk factor.

Returns from term deposits are usually calculated daily and can be paid either monthly, every six months, annually or when the bond matures.

The downsides to term deposits is that unlike an instant access account, you can’t withdraw your money early without being penalised, and unlike stocks, they don’t offer capital growth.

You should consider the following before investing in term deposits :

  • Match the amount you invest and the term you decide on with your current financial status to ensure you don’t require access to your money within the chosen duration.
  • Never put all of your eggs in one basket. It is important to keep some money available, possibly into an instant access savings account allowing yourself to be prepared for the financially unexpected.
  • Alternatively you could also open several term deposits at different times, allowing you to spread out the maturity dates and amounts invested.

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