Lock in your term deposit rates NOW

Interest rates are tipped to fall in 2019 and 2020 from the already low rates now being paid to savers. It’s entirely possible that there could be two 0.25 per cent reductions to the RBA’s official cash rate by the end of 2019, bringing it down from 1.5 per cent to just one per cent. This will mean, for many investors, that they have to save smarter if they’re going to make the most of their money and the interest that is available.

In short, now is the time to lock in your savings rates before they fall. And beware of putting all your cash into one TD only.

Retirees and savers may be feeling the pinch

It seems like an age since the heady days of 2008, when interest rates reached a bounteous 7.5 per cent. Anyone who’s retired in the last decade, or who is saving for a house deposit or something similar, will have struggled to get much in the way of serious returns from their funds. While it’s unlikely that the cash rate will rocket upwards any time soon, there are things that you can do with your money to maximise your income or stash, especially if you’re using term deposits.

One such way is to ladder your term deposits

If you’re planning to carry on using term deposits as one of your investment vehicles then you’ll need to work out whether you should deposit your money in short term or long term deposit accounts.

If you look at the short term options, you’re probably hoping that the interest rates will rise over the next year or two so you can move the money into a sprightlier account. On the other hand, if you’re looking at longer term deposits then you may be thinking about locking the money in at the current rate just in case the rates fall further.

In reality, without a crystal ball, you’re not going to know what’s the best course of action. This is definitely a scenario in which you should make your money as agile as possible with a mixture of short and long term deposits.

Think about laddering your term deposits

At the moment, it seems that there’s not much difference in the highest rates on offer once you compare term deposits that are longer than 60 days. This can make it harder to decide what to do.

A sensible solution to this uncertain environment is to stagger—or “ladder” your term deposit investments instead of coming down on one definite side of the fence.

Laddering is a strategy that gives you regular access to your funds with short term accounts, as well as the stability of knowing what some of your money will be earning for at least the next year with long term accounts. If the base rate comes up suddenly, then your short term deposits will soon be able to move up a notch and you’ll also have the option of drawing the interest off more frequently.

It’s always a good idea to compare interest rates on term deposits before settling on the ones you want to use. You should also use a calculator to see how much interest you’ll earn over various time periods.

How does laddering actually work?

When you ladder your term deposits, you split your money into several different piles and deposit it into long term (any term deposit over 12 months) investments, one at a time.

If you have, say $50,000 to invest, you’d split it into five separate amounts and invest the first amount for five years, the second for four years, the third for three and so on. By structuring your investments in this way, you’ll always have some funds maturing, paying you interest or, in the case of the longest term, growing safely with no nasty surprises. Laddering means that even in a time of low bank rates term deposits can still work well for you.

A good way to look at laddering is to think of it as planting vegetables with different growing periods; you’ll always have something ready to harvest so you can eat regularly. By the end of the growing year, you should have a nice stockpile of all your different crops, too.

The advantages of laddering your term deposits

Even though in Australia term deposit rates aren’t at their best, laddering still offers lots of advantages to investors.

You’ll be able to take advantage of the current interest rates for longer, just in case they do fall further.

Laddering is also a highly structured way to invest your money, so you can fine tune your investments and exert more control over them.

You also have much more flexibility as you can move some of your funds into new terms (hopefully with better interest rates) rather than having all your money stuck in the same account for several more years.

Once one term deposit matures, you can take it elsewhere, either to another bank or a different investment vehicle altogether.

The disadvantages of laddering term deposits

Although laddering is a great investment strategy, it does have some downsides and it’s important to look at them before doing anything with your money.

If you needed to access all of your money suddenly, you’d have difficulty getting to some portions, especially the ones in longer terms.

Laddering isn’t great if you’re saving for something specific in the short or medium term. If you’re saving up a house deposit, for example, you might miss out on some properties while waiting for all your funds to mature and pay out.

The biggest downside is that some of your money may end up being locked into an interest rate that doesn’t look quite as good as it did at the start of the three, four or five years. If there’s a sudden uptick in the cash rate and your more agile funds have already skipped onto the higher rates, it can be frustrating to watch some portions languishing on 1.5 per cent or so for another couple of years.

As you can imagine, if you ladder your investments, you’ll have to do more paperwork and planning.

Given the current interest rate climate, however, these downsides may not outweigh the advantages of laddering.

Compare term deposit rates, fees and features from Australia’s major banks, credit unions and other financial institutions here.

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