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Long term deposit vs short term deposit

Long term deposit vs short term deposit

Long term deposits (over 12 months) generally offer higher rates than shorter terms but your money is locked away and you can’t grab a better deal if rates change. Short term deposits generally have lower rates but you can access your money sooner.

Most term deposit investors favour shorter term deposits with only about two per cent choosing terms over two years. Are they missing out on the highest rates just so they can access their cash sooner? Which is best for you? A short term deposit or a longer term?

First let’s look at the best deals in the market right now;

What are the best rates right now on term deposits?

The best rates in Australia (in February 2017) on term deposits are:

Five year term deposits are paying as much as 3.30 per cent.

Four year term deposits are paying up to 3.10 per cent.

Three year term deposits are paying up to 3.20 per cent.

Two year term deposits are paying up to 3.10 per cent.

One year term deposits are paying up to 3.0 per cent.

Six month (180 day) term deposits are paying up to 2.80 per cent.

Three month (90 day) term deposits are paying up to 2.75 per cent.

Should I choose a long term deposit or a short term deposit?

The highest rates in the market right now are available on the longest term – 3.30 per cent for five years – while the shorter terms do not pay as much interest. But that doesn’t mean you should necessarily put all your money into a long term deposit.

Long term deposits are often favoured by retirees who are looking for a low risk cash investment to provide a reliable income stream. These people don’t want to access their cash quickly and they aren’t looking to build their savings for a particular purpose or purchase.

They have locked in a good rate are getting a low risk income stream but there is a risk. They risk missing out on even better rates in the future should things change. And if they need to access their cash for an unexpected reason, they could be penalised and miss out on part or all of their interest earned.

This is the risk of a ‘set and forget’ strategy. Many savvy savers take an active approach to their term deposits.

Active savers get the best deals

An active term deposit strategy allows you to grab the best deals as they become available. The key is breaking up your money, even if you only have a relatively modest lump sum, into separate amounts that can be deposited into more than one term deposit. This can give you access to the high rates on offer from long term deposits and the flexibility of shorter terms. Term deposits are fee free, so you don’t get penalised for having more than one account.

As well as a long term deposit, an active saver will invest in at least one shorter term deposit and keep an eye on the best rates available at any particular time. Term deposit rates change regularly so savvy active savers keep an eye on the market and don’t limit themselves to term deposits from their own bank or credit union.

You can keep an eye on the term deposit market here.

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