Real Estate

What Is A Term Deposit and How Does It Work?

One of the most popular ways to invest is through term deposits. If you haven’t considered term deposits because you’re not sure what they are or how they work, now is the time to find out.

What is a term deposit?

When you make a term deposit, you are handing over a certain amount of your money to a bank or other financial institution for an agreed upon amount of time, or term. The financial institution will invest your money while they have it, and, in exchange for the right to hold your money, will give you a certain amount of interest.

You as the customer agree to keep that money in place for the entirety of the term, which can be as short as a month or as long as five or even ten years. The bank agrees not to change the interest rate over that time. If you withdraw your money before the term is over, you will pay a penalty.

How is this different from a simple savings account?

As you learn how term deposits work, you may wonder how it differs from other accounts. When you open a savings account, the bank invests that money and gives you interest on it: so how is that different from a term deposit? There a few key things to know:

Monthly balances

You may have to keep a minimum balance in your savings account to avoid paying a fee, but otherwise your account balance might fluctuate from week to week or even day to day. You are free to use your money whenever you want. With a term deposit, the bank knows exactly how much of your money it has and for how long.

Interest rates

Because the financial institution knows exactly how much money they will have, and for how long, they are able to offer higher interest rates for term deposits than you can usually get with a savings account.

Why do people choose term deposits for investment?

When you make an investment in shares or other fluctuating markets, you have no idea what the market might do. Markets can be highly volatile, so some investors prefer the stability of term deposits. Term deposit gains can be smaller than what you’d get from stock market investment, but they are also guaranteed.

How do I start a term deposit?

In most cases, the process of applying for a term deposit is nearly the same as applying for a bank account. The first step is choosing the amount you feel comfortable investing, deciding how long the term should be, and then finding the right offer. Then you’ll simply fill out a form, which can be done online.

Tips for making a smart investment

Know your term length

You can get term deposits for just 30 days or for much longer: the key is choosing what works for you. Once you’ve invested in a term deposit, you cannot remove the money without paying a penalty, so it’s wise to carefully consider your personal situation and the chance you’ll need to access that money before choosing your term length.

Look for a secure financial institution

While Australia does have a Financial Claims Scheme to protect customer deposits, it’s still important to check the credit rating of any financial institution you’re considering. Make sure you’re comfortable with the stability and reputation of an institution before you deposit any money.

Find out about automatic renewal

Some financial institutions will automatically renew your investment unless you specifically tell them not to at the time the term is up. This puts all the onus on you, and it can be easy to forget that your term’s end is coming up. Make sure you know the details of your deposit and make a note of the date so you can make the right choice when the time comes.

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