March 3, 2014
Term deposits are one of the most stress-free ways to invest your money. Similar to regular transaction accounts, your money sits with your bank or credit union for a fixed period of time – but without you touching it.
If you’d like to do something with your money that involves little on going management while increasing in value, fixed term deposits could be just the option for you. Below we explain how this investment type works and some of the advantages and disadvantages.
Safer than houses – so to speak: With term deposits, there is little risk of losing your initial investment. Until the 12th of October this year, all term deposits are guaranteed by the Government, and after this date, deposits up to a certain amount will continued to be guaranteed. Have a look at the APRA financial claims scheme page for more.
Importantly, the term deposit rate does not change for the time you fix for. Your investment is not subject to changes in the Official Cash Rate (OCR) or other economic factors. It is simply set.
It’s about the time: The rate of return depends on the amount initially invested and the time you fix for. Most term deposits require a minimum of $1,000 to start with, but some have lower entry points. If you have a little more cash, you might also look at options that require a minimum of $5,000 to start.
To give you an idea of the differences in rate of return, at the time of writing this, fixing your term deposit for 90 days would deliver a rate of around 5.75% (the best rate being 5.95%) whereas if you fixed for one year, the rate would be around 6.30% (the best rate being 6.90%).
Calculations are key: It can often make more sense – depending on the rate of course – to choose a provider that calculates interest on a daily basis payable monthly, than those that calculate interest monthly, because the interest you earn is slightly more. But again, this depends on the fixed term deposit features as a whole, so do some figures and work out where you will be at the end of the term across a range of options.
Tight lid on the cookie jar: Once you have fixed your term deposit, you can’t touch it, and if you have to you’ll likely have to pay a penalty. Make sure you are 100% comfortable with the term you choose and the deposit amount you fix. If you think it might be a stretch, have a look at some of the online savings options instead – they can often have good interest rates attached, but you’ll have to use your own will power to keep the lid on the cookie jar.
Diarising the date: When your term deposit is due to roll off, it is important to review the rates on offer across all providers and to also check if your Honeymoon rate will apply for the second investment term – if you choose to stay with your provider and if this rate initially applied.