How Term Deposits Work
Providing individuals with the opportunity to deposit a specific amount of money for a predetermined period at a fixed interest rate, term deposits are a prevalent financial product offered by banks and financial institutions worldwide.
In this article, we will explore the features, benefits, and considerations associated with term deposits as an option to work towards achieving your financial goals.
1. Definition:
Term deposits allow you to deposit a specific amount of money for a predetermined period, typically ranging from a few months to several years. During this fixed term, the funds are locked in, and you earn interest at a fixed rate. The key characteristic of a term deposit is that the money usually cannot be withdrawn until the end of the agreed-upon term without incurring penalties. In certain circumstances this can include deductions from your principal, meaning you get less back than you originally invested.
2. Features and Benefits of Term Deposits:
a. Fixed Interest Rate: Term deposits offer a fixed interest rate, which remains constant throughout the duration of the deposit. This means that regardless of any fluctuations in the market, the interest earned on the deposit remains the same.
b. Government Guarantee: Term deposits in Australia are covered by the Australian Government Guarantee Scheme for Deposits. This scheme provides protection to depositors for up to $250,000 per account holder, per authorised deposit-taking institution (ADI), in the event of the institution's failure.
c. Interest Payment Options: Australian term deposits generally offer different interest payment options, including fortnightly, monthly, quarterly, semi-annually, annually, or at maturity. The choice of interest payment frequency depends on your preference and financial goals. Keep in mind that different payment frequencies may attract different interest rates.
d. Diversification: Depending on your existing investment portfolio, term deposits can be a way to add diversification and may reduce overall portfolio risk.
e. Suitable for a range of financial goals: Whether saving for a holiday or a home, term deposits may be a suitable option to work towards your financial goals.
f. Reinvestment Options: At the end of the term, you have the option to renew the deposit or choose to withdraw the funds, offering flexibility when managing your finances.
g. Income Stream: You can choose an interest payment option that suits your cash flow needs, allowing you to receive a regular income stream from your term deposits. One way to achieve this is to use what’s known as a laddering strategy.
Depending on your circumstances and financial goals, term deposits may be a suitable choice to manage your savings. With fixed terms, fixed interest rates, and the government guarantee scheme, they provide peace of mind and protection for your savings. By understanding the features and benefits of term deposits, including the laddering strategy, you can make informed decisions when considering your financial goals.
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This information is general in nature and does not take into account your objectives, financial situation or needs, therefore, you should consider whether this information is appropriate for your personal circumstances before making a financial decision.
