A term deposit is a fixed term deposit held at a financial institution. They are typically for a short term that has a maturity range from one month to a couple of years. A term deposit has withdrawal stipulations, once the term has ended, the borrower must give the financial institution notice before making a withdrawal.
Term deposits are available from most banks and financial institutions and, due to the safety of this kind of investment they appeal to low-risk conservative investors. Term deposits sold by credit unions are insured by the National Credit Union Administration. The Federal Deposit Insurance Corporation insures term deposits that are sold by banks.
So the risks are quite low, however the returns are low as well. That said, there are several ways to save money with a term deposit, here are some of them.
You are guaranteed a fixed interest rate.
As long as you are happy with locking your money away for a certain period of time, a fixed rate of interest typically pays higher returns than a savings account that is easy to access.
You money is locked away so you are unable to spend it.
If you are not good with money, this is a good way to save. You will not have access to your funds until the fixed term is over. Some institutions may permit an early withdrawal; however, you will have to pay a fee.
You can take advantage of compounding interest.
Compound interest allows your money to work for you without your intervention. The money that you put into a term deposit account accrues interest at the agreed rate.
If the rate of investment is set at 3.5 percent, and you have deposited a $10,000 initial investment, you will earn $350 over 12 months. Interest is calculated and paid out on a set basis annually, quarterly, or monthly. Depending on how often the interest compounds, the more money you will gain. In the example above in the second year you will earl $365.
Since your funds are locked into the account, you will automatically reap the benefits of compound interest.
Investment is a great way to increase your earning potential if it is done the right way; saving with a term deposit is simply one of the many ways in which you can make your money work for you.