In the world of personal finance, there are a huge number of different financial products to wrap your head around.
Term deposits are one such product – they can be hugely beneficial in many savings situations, and should not be overlooked.
Why? Let’s take a closer look at what they are and how they work so you can decide whether or not term deposits are right for you.
What is a Term Deposit Account?
A term deposit is a financial product that you can use to save money with the intention of having it accessible later on in life. This makes them ideal for saving up enough funds to cover expenses like university tuition, retirement and home repairs.
Term deposits are also often used as investment products – meaning they’re an excellent way to make your money grow beyond what a traditional savings account would provide over time.
Unlike investments like stocks or shares, there’s no risk of losing any money if the market drops (unless you choose a “coupon” option). This is because term deposits use a fixed interest rate. That means that even if the market takes a dive right after you invest some cash into term deposits, you’ll likely be better off than you might have been in other types of investments!
Here is an example of when you might use a term deposit
You need to save up some cash for a big purchase or expense – in this case, your school tuition fees.
Or, maybe your retirement is getting close – you are looking at putting away the maximum allowable amount each year in order to be ready when it comes time.
Either way, you want to invest in something that has guaranteed returns and won’t fluctuate with market volatility. However, you want to ensure that you still have access during emergencies if needed.
If any of these situations apply to you, then a term deposit could be the investment option for you – if so, its probably worth exploring further!
Term Deposit Features
When it comes to term deposits, they have a few common characteristics, or features:
Fixed Returns: You can’t lose money on a term deposit because they have fixed returns. This means if inflation exceeds the rate at which your account grows (which is very rare) then you won’t be able to make up for any losses due to changes in value. However, most people see these as an advantage since it protects them from market volatility or worrying about their investments fluctuating too much between now and maturity date.
Accessibility: A term deposit holder has all his or her money locked up for a specified period of time (the “term”) but earns higher rates of return than most other investments offer because they are guaranteed.
Flexibility: Usually, you’ll be able to choose between a number of maturity dates. You’ll also probably have the option to reinvest your interest earned back into your term deposit, or into your bank account. Additionally, you’ll be able to choose how often you are paid interest. Finally, you can even apply for a term deposit online, making the whole process fairly easy.
Fixed Term: The term of a fixed deposit is what an investor agrees to lock up his or her money for, usually between one and five years.
Minimum and Maximum Amounts: The minimum deposit on a term deposit generally ranges from $500-$1000. The maximum is capped at a certain amount, which will vary depending on the bank you have an account with.
The Benefits of Using a Term Deposit
Here is a list of some of the advantages of term deposits:
- You know what your interest rate is.
- Your money stays safe, because you won’t be tempted to spend it before the term period ends.
- You can lock in a set rate for the duration of your investment.
- It’s low-risk, so you won’t have to worry about market performance and fluctuating interest rates.
The Disadvantages of Using a Term Deposit:
- It takes some time and commitment; term deposits are not liquid, and if you want to access your funds early, there may be fees or penalties involved.
- If market rates improve, you’ll be locked into whatever you initially agreed upon and will not get to benefit from market changes.
- The return on a term deposit is lower than that of other investments.
How Does a Term Deposit Work?
When it comes to the process behind setting up a term deposit, there are a few steps you’ll need to take.
First things first, you need to decide on how much money you’re willing to invest and when this investment should end (or “mature”).
You’ll then need to find an institution that offers term deposits – either through their own website or through one of many online services like NetBank® Australia.
Once you’ve found the best deal for yourself, you’ll need to provide the institution with some contact information and they will provide an account number.
How to Withdraw a Term Deposit
If the term deposit has reached maturity, the withdrawal process will be pretty straightforward. However, if you decide to withdraw your term deposit before it matures, there may be penalties involved. Generally speaking, the longer the duration of your investment, the higher these penalties will likely be.
You’ll need to contact your financial institution and let them know that you want to make a withdrawal from your term deposit account – providing them with any necessary (and accurate) information they might need in order for this transaction go through seamlessly. The amount of money withdrawn should reflect what’s owed on the account as well as any fees or charges associated with making such a withdrawal.
After withdrawing funds from their term deposit account, investors are generally allowed access again after one year has passed – though if applicable terms have not been met, this waiting period can be extended.
Ultimately, just remember that withdrawing money from a term deposit account before the maturity date can have costly consequences, and may result in you forfeiting the interest earned on that account.
Term Deposits in Australia
Ultimately, term deposits are a great way to save for the future, and come with access to interest rates that are generally higher than those offered by traditional savings accounts in Australia.
For a bank to provide a term deposit (and to provide credit more generally), they’ll need to have an Australian credit licence.
It’s important to remember that not all term deposits require one year of waiting before withdrawing money – these investments can also be withdrawn after six months or three years have passed. Furthermore, there may be some exceptions in which cases an investor is allowed to withdraw money without penalty and before the term deposit matures (such as when the account holder dies). Finally, twelve-month term deposits often offer more competitive interest rates than other options because they only need one month of maturing time before withdrawal privileges are granted.
If you’re interested in learning more about how term deposit accounts work from start to finish, contact your financial advisor!