Visit any financial institution, and you will probably see advertising for term deposits. Many banks claim they have the best term deposit rates but harbor secret fees and charges. What is a term deposit? How can you find the best term deposits?
A term deposit is an investment product offered by certified lenders. To open a term deposit, you simply deposit a desired amount of money (called a principal) into a term deposit account. Over time your principal will earn interest and pay you back small dividends.
The catch with term deposits is the principle is locked into the account for the agreed term. The term can vary, and at the end of this time the investor can choose to withdraw their principle or reinvest for another term.
A term deposit seems like a slow and restrictive way to earn interest, so why should you invest in one?
A term deposit poses virtually zero risks for investors. You can invest the desired amount and know exactly how much you should expect to see in returns. The best term deposits are protected by the Australian government under the Australian Government Guarantee Scheme, but make sure you select an ADI approved lender.
This “scheme” offered by the trusty government of Australia ensures your money will be paid back if anything was to happen to your ADI approved lender. If only the government would support all businesses like it does banks.
Because your money is locked away for a guaranteed term, your lender can use this money as if it were its own. Banks and lenders use deposited cash to play various financial markets, and their sole purpose for existing is to make money.
Because your money is generating “interest” by sitting in your term deposit account, you will be paid a small amount of this interest. In the world of investing, low risk usually equals low reward, but the best term deposit rates are comparable to a high-interest savings account. Term deposits will give a decent return for the risk involved.
Incentive to save
As mentioned above, even the best term deposit rates will be comparable to a high-interest savings account. What’s the difference? Well, not much really, but a savings account offers more flexibility as you can withdraw funds early.
With the restrictions of a term deposit comes some unexpected benefits. Having your money locked away means you won’t be tempted to withdraw funds for impulse purchases. Term deposits are a good way to get started in the world of investing.
Opening a term deposit account and keeping your money there until the term matures is an excellent way to build a credit history. Credit history can affect the interest rate if you decide to take out a personal or home loan. A strong credit history will also improve your chances of being approved.
A successful term deposit demonstrates an ability to save and manage finances. A demonstrated ability to save coupled with a good credit history will make applying for loans and lines of credit easier and cheaper and will put you in good stead if you decide to take out a mortgage.
On paper, term deposits seem slow and constrictive. The usefulness of a term deposit depends on your goals as an investor. If you want a steady and reliable stream of income without constantly monitoring its health, a term deposit could be the perfect fit. If slow and steady is not your thing, a term deposit will bore you to tears. If fast-paced thrills are what you seek, may I suggest bungee jumping?