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Deposit Decisions – How to Decide Which Term Deposit Is Right for You

2 August 2018 No Comment

The language of money can be very difficult to understand. We all love money-love to spend it, love to save it, and some even like to waste it, but to understand in the ins and outs of how money works you would have to take a financial course. Most of us, though, learn about money through personal experiences—good, bad and ugly ones.

All people learn that saving for a rainy day, a holiday, a house, a car or anything is the wisest step. While saving is good, saving with a purpose is even better, and certain types of accounts can yield better returns. In addition to your average passbook savings account and retirement accounts, term deposit accounts are a way to save money, depending on the type.

Let’s take a look at some of the most important aspects of term deposit accounts to help you determine which term deposit is right for you.

What Is A Term Deposit Account?

Also known as a certificate of deposit (CD), the term deposit does a little more for your bank account than a passbook savings account. People usually open these types of accounts when they are making long-range financial goals for purchasing property, saving for college, or for any other major purchase. Usually, the type of term deposit you would open depends on your financial goals.

Term deposit benefits include being able to park large sums of money in an account that will earn more interest than standard savings and be low-risk investments. However, drawbacks include they do not earn a lot of money interest, there is usually a penalty for withdrawing early, and some require large principal sums. The main types of term deposits are short-term, long-term, and ladders.

Short-Term And Long-Term Deposits

Both short-term and long-term deposits are good investments to make, but they are used for different purposes. Short-term deposits can last anywhere from one year to five, and they typically yield the lowest interest. Long-term loans can last between five and ten years.

The loan rates vary depending on the principal balance and the interest rate at the time of the deposit. Typically, the more you place in the fund the higher the interest. Additionally, most accounts have a minimum that can be as low as $2,000 and anywhere as $5,000 or more. Long-term deposits tend to yield more interest simply because the money is in the account for longer time.

Furthermore, with the various types of financial institutions offering term deposit accounts, the rates can get pretty competitive. For the most part, online term deposits typically yield higher rates. Choosing an account will all depend on your financial goals, how much time and money you have to invest and the rates available. For example, parents planning to send their child to college might look to a long-term account that matures just before the child reaches his/her majority.

Ladders

These term deposits allow investors to stratify their savings. An investor could simply invest multiple amounts in one account, and as each investment matures, the person can access the funds without penalty. For example, a person investing $20,000 in total could break this amount up into one amount for $5,000, another for $7,000, and the final for $8,000, each amount maturing in one, two, and three years, respectively. At the end of the first year, the investor would be able to access the first $5,000 and the interest accrued for that year. Many invest money in this way to avoid tying up their funds.

Choosing Wisely

Saving money is always a wise choice, in and of itself. However, when deciding on the type of term deposit to use, investors have to take in a number of considerations, namely the financial goal (house, car, or business), the principal amount, and the time. In choosing a term deposit, there really is no bad choice because, when speaking with your financial advisor, they can help you choose an appropriate fund.

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