The investing journey can be a daunting, confusing process. Financial advice websites are littered with jargon and hard-to-understand language, and it can be difficult to decipher what the experts really mean. What’s a dividend? And how is an EFT different from a mutual fund? But if you’re new to the investing game, or just wary of the ‘ins and outs’ of the stock market, investing in safer, low-risk products like term-deposits may be the option for you. They’re a simple, user-friendly concept, and many people happily enjoy the benefits of purchasing a fixed term-deposit from their bank.
What is a Term-Deposit?
A term-deposit is widely considered the lowest-risk investment you can make, and it is essentially a special kind of savings product that you open with a bank. To begin, you deposit an amount of money for a set period of time, and the bank invests your money in financial products with higher returns.
Term-deposits generally have a fixed interest rate to go with their fixed term, and these interest rates are usually higher than regular savings and transaction accounts. This way, you can calculate exactly how much interest you will receive when your term-deposit matures.
For the length of the deposit term, you cannot withdraw the funds – they must remain deposited for the entirety of the agreed upon term. Terms can be short-term or long-term, and often range anywhere from one month to ten years. Occasionally it’s possible to withdraw your money before your deposit matures, but you will generally need to provide a predetermined number of days notice. You will also probably have to pay a withdrawal penalty, and there may be extra charges or fees afterwards. It’s important to do your own thorough research before purchasing a term-deposit; this way you’ll be better informed when making and decision and won’t be blindsided by their inflexibility.
Choosing the best Term-Deposit for you
Similar to any important financial decision or investment, the purchase of a term-deposit should be a well thought out process wherein you educate yourself and do your own shopping around. Current information on the various term-deposits offered by each bank or credit union can be found on each providers’ website.
Some Term-Deposit FAQs:
How risky an investment are term-deposits?
Since term-deposits are a type of investment there is an inherent risk, so always be careful and informed when choosing a deposit. Without changing interest rates (as term-deposits have fixed rates) you don’t have to worry about constant instability or fluctuations. Another benefit that reduces the risk of term-deposits is your ability to calculate the total interest you will receive, which allows for better, more concrete planning and helps you to assess any potential risks with this in mind.
Overall the main risk associated with term-deposits is their inflexibility and the guarantee of a breakage fee should you withdraw your money. However, if you’re certain you can invest the deposit for the entirety of the fixed term, a term-deposit is a safe investment option.
How do I go about breaking my term-deposit?
In the event that you urgently need money, and you think you’d like to break your term deposit, first double check the terms and conditions of your deposit. This fineprint should explicitly outline your rights in relation to your term-deposit, and whether or not you are to, and how quickly you can, access your money.
Many banks and credit unions usually require 31 days’ notice of withdrawal before you are able to access your funds, so make sure to notify your provider as soon as possible. After this, you will need to pay a breakage fee, so even doing some research beforehand can help prepare you for the cost of this. Depending on the terms and conditions of your deposit, you may also need to surrender a percentage of your interest as payment for breaking your term before it matures.
Knowing the particulars of your agreement will prevent you from making unwise decisions, and can save you money and time. Part of your initial research prior to purchasing a term-deposit should include developing a strong idea of the potential costs involved and your realistic ability to fulfil an agreement.
Do term-deposit interest rates ever change?
The beauty of a term-deposit is that it is sold with the promise of a fixed interest rate. This means that the conditions of your agreement expressly forbid the change of a deposit interest rate before it matures. Regardless of changes in the interest rate market, you should count on a lack of change or fluctuation, as contractually, banks or credit unions cannot alter the interest rate once you have both agreed on it.
However, once your deposit matures, your bank may choose to rollover your deposit into a new term, occasionally with a lower interest rate. If you don’t contest or review this in time, your money will most likely be locked into another fixed term, and you may have to wrangle with breakage fees and penalties. This is largely why it’s useful to keep track of the maturity of your deposits, and to stay on top of competitive rates at other banks. If, when your deposit reaches its maturity, you find a better, more advantageous rate, feel free to reinvest your money with the bank offering the greater returns.
This guest post was graciously provided by Sofia Lockhart. Sofia is a passionate writer from Sydney. She also enjoys decorating houses and engaging in home renovation projects. That is why she loves sharing her experience and advice with other people through her writing. Besides this, she loves technology and gadgets which can help us get through a busy workday.