What would I use a term deposit for?

Whether you’re saving for a holiday, a house or a more comfortable future, a term deposit can offer an attractive mix of higher returns and reliability.

Term deposits are a great way to stay on track with your savings goal, as you typically can’t withdraw funds before the term matures without some sort of penalty. Also, the interest rate is locked in for the agreed term, so you know exactly how much you’ll get back at the end even if there are cuts to the official cash rate.

Here's how to use a term deposit to grow your wealth.

What is a term deposit?

Term deposits are a type of investment product offered by banks and other financial institutions; they pay you a fixed rate of interest over a specified period – typically from 90 days up to five years.

As long as your provider is an Authorised Deposit-taking Institution (ADI), your money is backed by the Australian Government up to $250,000, making term deposits a safe and reliable investment.

How much interest can I earn with a term deposit?

The interest rate on a term deposit usually depends on how long the term is. Generally speaking, the longer the term, the higher the interest rate.

Interest is paid quarterly, biannually, annually or when the term is up. With most term deposit products, you can access your interest before the maturity date, although taking interest payments out before the maturity date may decrease your overall return.

What can a term deposit be used for?

Offering virtually no risk, no fees and a fixed, predictable interest rate, term deposits can be a good choice when saving for a variety of life events and purchases. The benefits might include:

· A short-term place to put your money. If you’ve had an unexpected windfall, you may want to consider placing your money in a shorter-term deposit – say, 90 days. That way, your money will be working for you while you decide how best to use it
· Saving for short-term goals. Saving for an overseas trip, your upcoming wedding or a new car? Choosing a term deposit of 180 days to two years could help you stick to your savings plan. You’ll know exactly what return you’ll get when your investment matures, and your money will be safe from temptation in the meantime
· Saving for long-term goals. Term deposits of three to five years could be used for longer-term goals, including saving for a down payment on a house, your children's education or for retirement

One way to use term deposits to help boost your retirement fund is through staggered maturity dates. This is called ‘laddering', and allows you to take advantage of different interest rates while creating a steady and predictable income stream as each term deposit matures.

How long should I keep my money in a term deposit?

The best term deposit for you really depends on your specific needs.

For example, Kate has just received an unexpected work bonus of $15,000. She plans to buy a home in the next few years and would like to use this money towards the down payment.

By choosing to put her money in a three-year term deposit at an interest rate of 3.15%, with interest paid annually, Kate knows she will have an additional $1,462.62 to put towards her new home when her investment matures.

See how your savings could grow over time with our InfoChoice Term Deposit Calculator.

Choosing the right term deposit

While term deposits are considered a low-fuss investment, there are a few important things to keep in mind. These include:

· Interest rates. Always shop around and compare interest rates to find the best product for your needs
· Maturity date. As your term deposit reaches maturity, don't automatically roll over into a new term if better rates are available
· Term length. Because you won't be able to access the funds until maturity, make sure that the term length is compatible with your financial needs

Offering attractive interest rates and a choice of term lengths, term deposits are a safe and reliable way to grow your personal wealth. Remember to compare offers from a wide range of institutions to get the best value for your money.

Start comparing term deposits now.

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