September 21, 2018

How using a term deposit account can stop you from spending

If your money is locked away in a term deposit it is hard for you to get at and spend.

You could argue that saving money is the easy part, it’s not spending it that is difficult. With ever increasing access and simplicity, bank accounts can hinder as much as help you save money. Not all accounts are easy to get at, though. In fact, some accounts will penalise you heavily for withdrawing from them.

Term deposits are a useful tool to help minimise the temptation to spend your money. In addition, term deposit rates in Australia are usually some of the highest interest rates available when putting money in your bank, which is great for growing your money as well.

What’s a term deposit?

A term deposit is simply an account which you agree to deposit a set amount of money into and not take any out of for a specific period of time, known as the ‘term’. In return, the bank promises to pay you a set interest rate and return your deposit once the term has expired.

There are a couple of variables with term deposits:

  1. The term. This is how long you agree to leave your money with the bank. Typically banks offer terms from one month up to five years.
  2. The amount of money deposited. Most banks will have a minimum amount required, this can be as high as $5,000.
  3. Whether interest will be paid monthly, annual or on expiry. Longer term deposits may offer the option to have interest paid monthly or annually. Shorter terms will generally pay interest on maturity.

These three factors will determine what interest rate you are offered for your deposit. Usually, term deposits with long terms and interest on maturity will have the highest interest rate. However, interest rates will taper off, and even decrease with the longest terms.

The amount you deposit will also sit within a range, for instance, $5,000 – $25,000. Each range has its own interest-rate; generally high deposits get a high interest rate.

So, how do they save you money?

You cannot access the money like a bank account, and if you do withdraw you are penalised.

Unlike regular savings accounts, term deposits have no ATM cards, chequebooks, or internet transfers. Once you put your money in and that is that. To get it out you must ask for it and lose a fair chunk of the interest you would have been paid.

Term deposits are a simple way of protecting your money from yourself. If you already have a little bit saved up and are feeling nervous about having it around, then consider putting it in a term deposit. Before you open one with your current bank, do a term deposit comparison to make sure you’re getting the highest interest rate.

About the author  ⁄ savings dotcomdotau

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