If you’re considering adding a term deposit to your financial strategy, you might be wondering about how and when you’ll be paid interest.
Choosing whether your interest is paid monthly, annually or at maturity can be stressful, so it’s essential that you understand term deposit interest and what it means for your money.
What is a term deposit?
A term deposit is an account opened with your chosen financial institution that earns interest at a fixed rate for an agreed-upon length of time. Your interest might be paid monthly, or according to a different schedule.
You can choose your investment amount, but with term deposits, you’ll be unable to access your investment until the term has expired (unless you pay a penalty fee).
What type of interest can a term deposit earn?
The most significant benefit of a term deposit is the interest that it earns. While all term deposits will earn interest, there are two different types your deposit might earn.
The first type is simple interest. Simple interest means that your original deposit amount earns interest at the fixed rate you chose when you applied for the term deposit. This interest is then paid to you at certain intervals, such as monthly or annually.
The second type of interest is compounded interest. Compounded interest means that the interest made on your original deposit earns interest of its own. Simply put, your interest is earning interest. All things being equal, compounded interest will build more profit than simple interest.
When does interest get paid?
How often your interest is paid to you is called payment frequency. Payment frequency is an important part of your term deposit choice, and the payment frequency varies from deposit to deposit.
For most term deposits, you’re able to choose your preferred payment frequency. You may choose to have your interest paid monthly, bi-annually or annually, among other options.
How should you choose your payment frequency?
Everyone’s preferences are different, so choosing your payment frequency is a matter of considering your priorities and patience. If you find yourself impatient when waiting for money, then having your interest paid monthly might be the right option because you only have to wait one month to see your earnings rather than a year or more.
It’s important to note, however, that some term deposits will earn higher interest when the interest is paid less frequently. You might find that you can get the best interest rate when you agree to have your interest paid at maturity, meaning you’ll have access to your interest when your term has expired.
What are the benefits of having your interest paid monthly?
The obvious benefit of having your interest paid monthly is that you’re able to have and spend the interest you’ve earned each month. Rather than waiting for a lump sum at the end of your term, you can enjoy your money sooner. This extra boost in your bank account can help you pay monthly bills or contribute to your everyday spending.
When your interest is paid monthly, you’re also able to see the fruits of your term deposit. This can keep you inspired to invest and encouraged to manage your money responsibly.