Term deposit: Upsides and downsides compared

If having looked at several savings options, you have decided to invest your money in a term deposit it would be in your best interests to ensure you fully understand how a term deposit functions. While they are an excellent way to grow your savings they are not for everyone.

The up side of term deposits

Term deposit accounts are a sure way of increasing the amount of your savings. The interest rates plus the fact you can choose how long you want to lock up your money are definitely worth tying it up for a fixed period. The advantages of these types of accounts are:

  • High rates of interest on your money throughout the fixed term
  • Guaranteed returns
  • They are a very safe investment
  • You control how long your money is locked away

You really can’t go wrong if you have a sum of cash and want to invest it as you’ll know exactly what you’ll get back at the end of the fixed term and if you don’t want to put it all into just the one term you can opt for the “ladder” strategy. This means investing in several term deposits with varying maturity dates.

Laddering allows you to take advantage of fluctuating interest rates and to invest when the rates are higher and allows you access to your funds. You can then reinvest if you wish as each fund matures. This is a very lucrative way to grow your savings.

The downside of term deposits

The basic downside of investing your money in a term deposit is that you cannot access it during the investment period.

In the case of an emergency you could cancel the term before the maturity date but there’s no advantage as the release fees, which vary depending on how much time the term still had to run, means that you won’t really have benefitted.

You need to be very sure that you can afford to lock up your savings. Also, the longer you lock your money away, the better it is going to perform so weigh that up against the possibility that you may need to access some or all of it before the term ends.

If in doubt, consider placing only some of your money in a term deposit and put the rest into another high interest account that allows you to access your money.

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