So you’ve managed to save up a lump sum of money, and you want to watch it grow with a competitive interest rate. Perhaps you’re worried that you’ll be tempted to dip into your savings for non-essentials?
A term deposit could be a great option to help you grow your savings and stop you from spending them.
Here are a few ways to compare term deposits and make sure you find the right one for you.
What is a term deposit?
A term deposit is an investment product that fixes your interest rate for a set period time, usually between six months and five years. You will be paid a fixed interest rate on your account balance, and will not have access to your money during this period of time, unless you break the term deposit and pay a penalty fee.
When comparing term deposits, remember that interest can be paid monthly, annually or at the end of the term. Some term deposits may even pay interest quarterly. Generally speaking, the more frequently interest is paid, the better, as this means that you are ‘earning interest on the interest’ already in your account.
Can I break a term deposit?
Yes and no. If you wish to withdraw money from your term deposit before the end of the term, you can usually do so by paying a break fee. You will need to read the fine print on your term deposit agreement to find out how much this is. Make sure to take this into account before signing up to a term deposit, so that you know what sort of penalty you’ll be looking at if you need access to your money quickly.
However, many banks have also now introduced ‘unbreakable’ term deposits – although these term deposits are not actually unbreakable. But they do require 31 days’ notice before any funds can be withdrawn.
This is something you might want to investigate while comparing term deposits. Also, make sure to check the conditions of your term deposit before signing up. The banks will generally not advertise unbreakable term deposits or break fees, so make sure you are not caught off-guard and then not able to access your money when you need to.
Why not just use a savings account?
In general terms, term deposits have historically had better interest rates available than savings accounts. However, make sure to compare a few savings accounts and term deposits if you are tossing up between the two. Interest rates are always changing, and you may find the rates available for savings accounts are comparable, or even better, than for term deposits.
Savings accounts do also allow you access to your money at any time, which can be a blessing or a curse, depending on your circumstances. If you are concerned that you could be tempted to spend some of your savings, a term deposit is a great option to lock away your money for a predetermined period of time, safely of course. This can be beneficial if you have recently reached a savings goal, and want to make sure your money stays where it is while also earning interest.
What should I look for when comparing term deposits?
When comparing term deposits, start by deciding in no uncertain terms what you can and cannot commit to. Make sure you know how much money you can afford to invest, and for how long. This may mean creating a separate emergency fund, and leaving a portion of your savings in it so that you never need to break the term.
Knowing how much and for how long you will be investing will reduce the number of term deposits you need to compare, as many have minimum and maximum terms and deposit amounts. From there, the next, and probably most important item to consider is the interest rate.
Like with savings accounts, when you are comparing term deposits, the general rule of thumb is the higher the better. Make sure to also check and compare the standard and special interest rates. Many term deposits will offer an increased rate of interest for the first three months or so, as an incentive to sign up new customers. Make sure that you choose a term deposit with an interest rate that will deliver value for the entire term, not just part of it.
Is a term deposit right for me?
A term deposit could be a great option for you if you have a lump sum of savings, and wish to invest it safely for a set period of time. Term deposits are also helpful for those of us who struggle not to dip into our savings, by removing the option altogether.
On the other hand, if you prefer or need to have instant access to your money, or want to continue to grow your savings, a term deposit may be too restrictive, or not deliver enough value.
Before you start comparing term deposits, make sure to weigh up your personal circumstances and preferences so you know what you can and can’t commit to.