A fixed term deposit is an account that locks in your money for a certain period of time and at a specified interest rate.
During this time, you can’t access your money without paying a penalty fee. When the term ends, you can either roll over the money for another term or withdraw it all.
Why invest in a fixed term deposit?
If you’re saving for a specific purchase, a fixed term deposit can be a useful way to achieve it faster. Your money is locked up, so you cannot chip away at your savings with unnecessary spending, even if you wanted to (at least, without paying a withdrawal penalty fee).
Fixed term deposits can also be useful if you’re someone who generally has trouble saving money. If you find it too easy to spend your savings on things you don’t really need, then a fixed term deposit might help remove the temptation.
Locking away your money for a fixed term can also help protect you against fluctuations in interest rates, if you find a high interest rate for your money. Of course, if interest rates rise while your money is locked in a term deposit, you won’t be able to capitalise on the benefit.
What should I look for in a fixed term deposit?
Shop around for the best interest rate. It will usually vary with the length of time you deposit your money for and will often be tiered, based on how much money you want to deposit.
Also think about how often interest is paid to you. It could be monthly, quarterly, annually or when the term expires. Consider finding a term deposit that offers you compound interest rather than simple interest. Simple interest is paid on your deposit at the end of the term. Compound interest is paid into your account regularly during the term, then added to the principal sum. So you’re earning interest on your interest, making you even more money.
Most financial institutions will charge you a penalty fee for withdrawing your money before the end of the term. Other accounts (often called ‘advanced notice’ term deposits) allow you to withdraw a portion of your money before the end, without being charged. Think about whether this might be useful for your situation.
Should you get a short or long fixed term deposit?
The answer really depends on your own financial needs. Investing for a short period (12 months or less) means you have faster access to your money and can reinvest it at the end of the term, maybe at a higher rate. Alternatively, if you lock in your money for a longer term at a good interest rate, you can avoid fluctuations and downswings in the market.
Another idea is to ‘ladder’ your investments. This means having a number of different term deposits, each with different maturity dates, instead of putting all your money into one term deposit. That way, if rates rise, you’re not locking all your money away and have some money free to take advantage, if better rates come along.