Savings Survival: Investing in term deposits
By Amy Bradney-George
September 9, 2009
How long would you survive on your current savings without an income? Many of us wouldn't last longer than a month according to new research from financial data organisation Dun & Bradstreet.
The Consumer Credit Expectations Survey * - which focused on Australian expectations for savings, credit usage, spending and debt performance for the coming September 2009 quarter - found that one in five working Australians could only survive 30 days on their current savings.
The signs of financial stress were most prominent with people aged 18-49 and those earning between $30,000-69,999 per year.
The Dun & Bradstreet report found that most people planned to cut back on spending over the next few months as a means of saving. And a good way to build your wealth is to invest it in accounts which discourage withdrawals.
For anyone with savings around $1,000 or more, there are endless possibilities with short and long timeframes for term deposits.
Below are some facts on the different timeframes for term deposit accounts and how to make them work for you.
Short Term Deposits
Short term deposits are usually accounts that mature in one-12 months, which means you can choose when you have access to your savings and interest within a year. This type of account is best suited to people who aren't sure how often they will need to dip into their savings.
Whether you need money for bills, holidays or for an unexpected debt, with regular access to your term deposit by choosing an account for a short term, you can compromise between saving and spending your money. In the meantime, while your deposit is locked into the account you can earn great interest on the principle amount.
Say you have $5,000 in a term deposit account that matures monthly. For a one month term deposit account, a quick search on RateCity shows interest rates reach up to 3.25 percent p.a from Rabo Plus , so you would earn $13 for that month if you closed the account on maturity.
If you moved your deposit and interest of $5,013 to a three month term you could receive a 4.58 percent p.a rate with Heritage Building Society and return $57 . If left for another 12 months, your nest egg of $5070 could grow a further $233 with the highest rate currently available at 4.6 percent p.a with Newcastle Permanent.Remember: the longer the money is in there, the greater the interest, and having regular access to your money might ease any worries over debts or spending.
Long Term Deposits
A general rule-of-thumb with term deposits is that the more money you invest, and the longer you invest it for, the higher the interest rate is likely to be.
With $5,000 in a term deposit account for 18 months, there are interest rates of up to 5.52 percent by MECU . At 5.52 percent you would receive about $390 if interest was paid at the end of the term.
As the above example shows, the frequency of the interest payments becomes more significant with longer term deposits.
Term deposits are an easy and effective way to turn your current savings habits into long-term investments. When you're looking for a term deposit account to suit your savings goals remember to consider:
How long you want to invest the money
When the interest is paid
Whether your current bank or credit union will give you the best deal
When the term is coming to an end, it's also important to consider what to do with your savings. In some cases you might want to reinvest with the same provider, but you should check whether the interest rate has changed, and shop around to compare what other offers are available at RateCity.