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Tips for comparing term deposits
A term deposit, also known as a fixed deposit, is an account where your funds are locked for a period of time earning a fixed interest rate. Once the term is over, you can choose to reinvest your money or withdraw it.
Pros of a term deposit:
- A term deposit is considered a safe investment.
- If interest rates fall, you will still earn the same interest rate on your term deposit.
- Term deposits can encourage healthy spending habits because the money is not available without a hefty penalty.
Cons of a term deposit
- Term deposits are not liquid assets and in the event of an emergency, you will need to pay a high fee for withdrawing money before the term deposit has reached maturity.
- You cannot increase the balance of a term deposit during the life of the term.
- Interest rates can rise in the future, but your term deposit interest rate will be locked.
Is a term deposit better than a savings account?
Term deposits are not better, but simply different. For people that are afraid to commit their assets for a fixed period of time and are interested in topping up the balance frequently, a savings account will be a better fit. For those looking for a safe investment with a guaranteed fixed interest rate return and will not need to access these funds for the fixed term, a term deposit is a good option.
How long is a term deposit?
Term deposits can be broken into two categories: short term and long term.
Short-term deposits can be as short as three weeks and up to one year. For short-term deposits, the bank will generally offer you a lower interest rate, but if you only need to invest money for a short period of time to save for something like a vacation, this can be a suitable option.
Long-term deposits are anything from a year upwards to five years. Generally, the longer the term deposit, the better interest rate you will be offered. This is a great option for those looking to invest in their future and can afford to not touch their money for a longer term. It is important to keep in mind that withdrawing funds from a term deposit early will result in steep penalties.
When is interest paid?
For short-term deposits, the interest will generally be paid once the deposit as matured. For long-term deposits, the interest rate will generally be paid annually.
Are term deposits taxable?
The interest earned from term deposits is considered income and under Australian law is taxable. You should declare the interest you receive in the year that you receive it and it will be taxed at the same marginal rate as your income.
What factors should I consider when choosing a term deposit?
- What is the interest rate?
- How often is the interest calculated?
- Is the interest compounded?
- Does this account have any associated fees?
- How long will the term length be?
- What is the penalty for withdrawing funds before maturity?
- Can you partially withdraw the funds without incurring a penalty?
- How often can you check the balance on the account?
- When the term deposit matures, what happens next?
How do I choose the right term deposit?
Term deposits come in a variety of amounts, term lengths, and interest rates. When choosing one, shopping around to find the best fit for your financial needs will be a key factor in success. That being said, here are four keys to keep in mind during the shopping process:
- How long can you invest your assets without needing to access them? The longer you can invest, the higher the return on your investment will be, but the longer you will have to wait to access those funds.
- Interest rate. Look for a competitive interest rate for your chosen term. Again, the longer the term, the higher the interest rate.
- The minimum amount. Term deposits will generally have a minimum amount required to open the account. Consider how much you are willing to invest.
- Financial goals. What are you hoping this term deposit will do for you? Assessing your goals for this term deposit will help you decide what is a good fit for your needs.
It is important to keep in mind that term deposit accounts should not have fees associated with them, including set up, annual, or ongoing fees. However, you should always check with the financial institution to ensure that this is the case. Some financial institutions might have fees or an investment minimum.
While there are no fees generally associated with a term deposit account, withdrawing your money before maturity will result in heavy penalties and should be avoided unless it is an emergency.
Do I need to give notice when withdraw funds early?
Yes, you are required to give a 31-day notice if you wish to withdraw your funds before your term deposit has reached maturity to relieve some stress on banks required to pay out before the term has ended. In some cases of extreme financial hardship, this notice can be waived.