Term deposits or high interest savings account? When it comes to managing your money, these are just a couple of investment options that you have. Short of putting coins on your piggy bank, storing your money on either a term deposit account or a high interest savings account is definitely a more viable, secure and sometimes even profitable option.
How Term Deposit Accounts Work
Basically, term deposits are an investment option offered by banks. Here, the money that you will deposit at the banking institution of your choice will be stored there for a certain 'term' or period of time - upon which it would earn a particular percentage as interest.
Let's say that the timeframe for the term deposit is five years, you will not be allowed to withdraw the funds that you deposited because it has not matured yet. If you do need to redeem a Term Deposit before maturity, additional charges will apply.
At the expiry of the term, investors may choose from the following options - depending on the banking institution. The first option is to withdraw both the principal and the interest that your savings earned by the end of the term or the maturity date of the account.
Second, you can withdraw the interest earned and keep the principal to be rolled over for the same term. A further option is to re-invest both the original amount and the additional income - and re-invest for a further period.
Generally speaking, the longer the period of time for which an investor is prepared to commit, the better the rate and the greater the income.
Term Deposits versus High Interest Savings Accounts
Now that you already have an idea about how term deposits work, what is the advantage of this option over high interest savings accounts? A Term Deposit shares many characteristics with a savings account, the distinction being the higher interest rate paid in return for agreeing to "lock-in" for a period of time.
The major advantage of a high interest savings account is the ability to withdraw funds whenever you wish.
With high interest savings, you will not be able to easily withdraw money from your account anytime you want. One reason to choose a fixed deposit over an at call account is that they usually pay a higher rate of interest - meaning more income for you. A Final Word about Term Deposits
At the end of the day, it doesn't matter whether you prefer term deposits over high interest savings or if it's the other way around. It is vital to pick the investment option that provides the best balance between interest and availability.
If you choose a high interest savings account, for example, you will be able to withdraw funds from it whenever you encounter a financial emergency.
Alternatively, investing in a bank's fixed term offering gives the additional safety of knowing that your original amount will not fluctuate.
A term deposit involves depositing an amount of money with a financial institution and making an undertaking not to make a withdrawal for a specified period in time. This time period or term is normally anywhere between 3 months and 5 years. Once the term expires, you can choose to either withdraw the money and the interest you have earned, or to make a redeposit. Generally speaking, the longer the term, the greater the returns on the money deposited.
For the Australian consumer, it is unfortunate that term deposit plans have not been rated by Cannex as yet. If the rating had already been done it would definately make choosing the best term deposit account easier. To help you along your way, here are a few things you may want to bear in mind when researching and comparing term deposit plans.
Assess your future financial needs before committing to a term deposit
Before you enter into a term deposit, you will need to know how much to deposit and how long you want the term to be. When making this decision, be sure to take a good hard look at the foreseeable future, to plan your cash flows carefully and to consider any longer term contingencies that may result in your having to prematurely end the term deposit agreement. Only deposit money you are fairly certain you will not need for the term of the deposit.
Interest rate cycles influence term deposit viability Interest rates are cyclical. Sometimes they are a a high and other times, low. Make a point of understanding where the interest rates are at before entering into a term deposit. This is especially valid if you opt for terms two years and longer. At present, the Australian interest rates are fairly high and you may stand to benefit from being locked in at this higher rate over the term of the deposit - more so if the interest rate cycle takes a downward turn.
Choose the best banking institution for your term deposit
Shop around. When you evaluate the different term deposit plans offered, be sure to consider the following:
o Minimum deposit - most banks have a minimum deposit that you need to deposit when opening a term deposit account.
o Interest rate - These differ greatly between banks. Also check whether the rate is variable or fixed.
o Banking fees - Some banks don't charge fees. Unsure you undeerstand the impact of any hidden fees or charges.
o Minimum term - check that the bank's minimum term matches the time period you require.
o Penalty fee - Early withdrawal generally results in a penalty. Check what the maximum penalty will be if you are forced to make a withdrawal before the end of the term.
o Renewal and Withdrawal window - In the fine print, you should look out for the automatic renewal clause. This clause generally details that should you not withdraw your money within a certain time frame after term deposit expiry, your money will be re-deposited.
Finally, if your depositing a large amount then try and negotiate better terms & ineterst rates. There is a very real chance that you will find the banks fairly ready to compromise in order to secure your term deposit business.
Richard Greenwood has sinced written about articles on various topics from Debit Credit Card, Credit Card Offers and American Express Card. This article on saving money and products is by Richard Greenwood of the Click 4 Group which runs a number of finance co. Richard Greenwood's top article generates over 135000 views. to your Favourites.