Life and Style
College 101: How Do Term Deposits Work?
I’ve just finished a mandatory personal finance course at my university, and I’m trying to get on top of my finances. I know that one of the strategies I should be considering is saving my money, but I don’t have a retirement account yet. As I was looking into savings options at a local bank, I came across the concept of term deposits, but didn’t really understand the concept. I’m not too keen on investing my money after seeing how the recession affected my parents, and I don’t want to make the wrong decision. Are term deposits a safe way for me to save my money? How exactly do they work?
Having some wariness surrounding investment vehicles is understandable, but from the sound of your question, it seems as if you’re more interested in saving your money rather than investing it. Put simply, a term deposit is a safe way to save your money, assuming that you don’t want to be able to access the money earlier than your target date in order to help pay for school tuition or luxury homes. That’s because, unlike other long-term savings options like a Roth IRA, a term deposit doesn’t allow you to retrieve money from it until its conditions have been met.
Unlike the more traditional savings accounts your bank might offer, term deposits are accounts that offer a higher interest rate in exchange for the bank’s peace of mind that they’ll have that amount of money on hand in order to lend to others. This gives banks the ability to maintain their lending while rewarding you for having a hand in the sustainability of their day-to-day operations. With short maturity rates ranging from a few months to a few years, term deposits are worth considering if you’d like your savings to accrue higher-than-average interest and know you won’t be touching the money for a little while.
Finding a savings account with a solid interest rate can be challenging, even in today’s economy. And a good rate of saving compared to a good interest rate can play a big role in the growth of your savings and your net worth in the long run. According to a study in the International Review of Finance on the factors that determine interest rates, “these differences may be significant, given, for example, a difference of 2.5 percentage points between the savings account with the highest rate and the median savings account rate in 2008.” Thus, to make the most of your savings, you must not only find the bank with the most competitive interest rate among your options. In some cases, that may mean picking the term deposit at your local bank or credit union, as they have your interest at heart since you’re also helping them stay afloat. In the end, a term deposit can be a win-win situation for both the bank lenders and the lendees.
So how do term deposits work and where can you find more information about them? According to experts, “term deposits offer a fixed rate of return for your cash, plus the peace-of-mind that your money is guaranteed.” This promise of a predictable, fixed return may be very appealing for individuals who are incredibly risk-averse. In addition to providing a wealth of information on term deposits, online sites are a great resource for keeping up with the latest news and term deposit rates on the market.
In the end, if you’re saving you’re doing a better job than the twenty-one percent of people living in America who aren’t saving any money at all. Even so, part of growing your wealth is making smart investment choices, so saving in term deposits does have its pluses. Only you can decide where to invest your savings and what to spend it on, but there’s nothing wrong with keeping it in a term deposit for the short-term if you know you won’t need to touch it before the maturity is up.Subscribe to The Daily Cardinal Newsletter