Picking the Best Term Deposit
Term deposit accounts are a great way to save money. They offer higher interest rates than the average savings account and you know exactly how much you will make on your investment as interest rates are fixed.
However, term deposits do impose a number of restrictions and are lacking in flexibility, so once you make the commitment it is hard to go back. For this reason it is essential that you pick the best term deposit for you at the outset.
To get the most from a term deposit you will need to make a substantial minimum investment and you must be willing to leave your money in the account for an agreed length of time.
The whole point of taking out a term deposit is to make your money work for you. When comparing term deposit products ask the banks how much interest your investment will have made when the term ends. By doing this you can make any easy and direct comparison between products and you know exactly how much your money will earn.
However, picking the best term deposit isn’t that simple. First, many term deposits require a minimum deposit which is usually somewhere between $1,000 and $10,000, though some can ask for a lot more. In general, the higher the initial deposit the higher the interest rate, though there are exceptions to this rule.
The other major factor you need to look at is the term of the investment. These generally vary from 30 days to five years and, again, the longer you are willing to invest your money for the higher the interest rate. You need to consider the term of your investment very carefully as you will lose a lot, or potentially all, of your interest earnings if you withdraw money before the term ends. So you must be willing to leave your money untouched for the full term.
This inflexibility is limiting, but it can be used to your advantage. The fact that you can’t access your money without paying a break fee drastically reduces the temptation to eat into your savings.
Like any financial product, any term deposit will come with its own fees and charges that you will have to look out for. As mentioned, the most common pitfall is probably the break fee for withdrawing money early. Many banks charge 50 per cent of the interest you are due, while others charge flat fees, or both. Also, you may be required to give notice in writing that you intend to withdraw money.
You should also be aware of when interest is paid on your investment. Many products will pay interest on maturity for terms under 12 months, and annually and on maturity for terms over 12 months. Remember that interest can be calculated in different ways so it is best to compare the amount your investment will earn on maturity than actually comparing the interest rate itself.