Term Deposits

If in your heart you know you want to save money and make it grow, but every time you walk into a shopping centre you start to feel weak in the knees and give into temptation, than…

“A Term Deposit is the Account for YOU!”

If you are a “spender” and want to become a “Saver” the best starting point is to remove the temptation by putting your money in a place where you cannot reach it. A term deposit is the ultimate lock box and best thing of all, it pays you!

So now that I have your attention; what is a term deposit?

A term deposit is a financial tool which locks in money and allows the bank or financial institution to lend that money out to another customer and charge that customer interest for access to the money. In return the bank gives you interest for lending them the money. To help visualise this process Think of your money as a rental property and the interest received is the monthly rent that the tenants pay.

The benefits of a term deposit compared to an eSaver include the certainty of when you will receive your money and interest along with the guarantee that the interest rate won’t change during the period regardless of what happens to variable rates. 

How do i set up a term deposit?

Step 1: The Hard Part Gather enough funds to get started,

I found the best way to gather cash over a period of time was to take it out of the bank and put it in a coffee tin under the bed, this goes against all that I have learned about keeping money in a place that is secure and allows the money to grow, but hear me out. By taking $80 out of the bank each week and putting it into a jar (hopefully you don’t dip into the money) than every three months you will have enough money to open a term deposit with an opening balance of $1000.

Step 2: Just like a nice pair of shoes you need to shop around.

One of the highlights about using a term deposit is the amount of options you get, you can choose how much to use, how long you want to lend it for and which bank you want to lend it to. So enjoy yourself and have a good look around at what the banks are offering. Something to remember is that rates go up and down regularly so ensure you gather all your rates and make a decision in a timely manner. Remember to not only look at banks have a look at Credit unions as well. The best way to “shop” is to visit each banks website and look for a list of rates (most banks will have a term deposits tab). Make note of the rates on a spread sheet.

Step 3: compare oranges to oranges and analyse your results

This stage is the most important, this is when you select which term deposit would best suit you and which will offer the biggest return. The first stage is to look at your spread sheet and highlight which bank offers the highest rate for each period as you can see below:

The next step is to take your 12 top term deposits and check what fees come with the term deposit, although some banks may offer a higher term deposit your interest may decay from the effects of fees charged on the maturity date. Now you can compare the different interest rates, I find the easiest way is to create a simple spead sheet that compares your options. The aim of the spread sheet is to compare how much interest you would receive over the period of the term along with the annual interest received after the fees have been taken out. This spread sheet does not take into account the change in rates that may occur when you compare four 3 month term deposits against one 12 month term deposit. Now you are ready to choose the best scenario of term deposits that will give you the highest amount of interest.

Open your term deposit either by walking into a branch or online you have the power, ensure you do not open a transaction account as well as a term deposit as most of your interest may be absorbed by fees.

Most importantly set a reminder in your calendar or phone to remind you when your term deposit has matured. This way you can ensure the funds are not reinvested

Step 4: Stand your ground cause this could get tough

Now you have done all the hard work it is time to open your term deposit. Term deposits can be opened in several ways including online, at a branch or on the phone. I find doing business on the phone tricky as you don’t get a chance to write everything down and quite often you miss something. So grab your cash and head to the bank or online to open your account. Don’t forget your objective of getting in and out of the bank with your term deposit and nothing else.

The aim of the bank is to sell you as many products as they can. The most common sales technique is to encourage you to open a transaction account for your matured term deposit to be deposited into, what they don’t tell you is that the fees for the account may be as much as $5 a month, on a 12 month term deposit this will possible remove the all the interest that you have earned.

Sit back and watch your money grow