How to benefit from Term Deposits

Term deposits provide a safe investment option for people with money they can do without, But first of all we have to define saving. Saving is when money is put to one side and left to grow and in some cases adding to the overall pot.

It can be extremely tempting to spend money when it can be easily accessed, so if you are easily tempted to dig into your savings, putting your money into a term deposit can protect it. Once you have put your money in it is very difficult to get it out before the agreed term expires and in some cases you will be penalised for doing. This is often a good enough reason to make you change your mind and hold your new computer, or whatever it is you were tempted buy until the account matures.

The key feature that make term deposits so attractive is that they tend to offer a higher rate of interest than other savings accounts. This rate is guaranteed for the duration of the term, so it is not affected by the RBA rate like other accounts. You can decide how long you want to lock your money away for, with terms ranging from just one month, up to several years.

It can be very beneficial to go for a term deposit offering compounding interest, especially if your interest is paid on a monthly or quarterly basis. This will effectively allow you to earn interest on your interest, which is another added bonus to aid the growth of your savings.

What to watch out for

As the Australian Securities & Investments Commission (ASIC) highlighted, those unfamiliar with term deposits must read the terms and conditions of the account carefully, as they could end up falling into possible traps. For example, in some cases term deposits will automatically roll over for another term if the investor has not instructed the institution to do otherwise, sometimes at a lower rate.

Although term deposits are backed by the Commonwealth government guarantee - up to $1 million automatically and free of charge, they are not a ‘set and forget’ investment. Most people shop around for the best interest rate when looking to open a term deposit, so this shouldn't change when the deposit matures, as rates are constantly changing so it is very likely that by switching accounts you could get a better deal.

Written by Sam Gooch