Term deposit interest rates are going up - but are they a good investment?
Are you:
Saving for a goal - perhaps a new car, a wedding, or a holiday - that you'll need the money for somewhere between a few months to 5 years?
Looking for an investment where you get back at least as much money as you put in, and is safe and low risk?
Wanting to earn more interest than normal savings accounts, while not yet ready to invest in higher risk investments like property and shares?
If your answer is yes, term deposits may be right for you.
Term deposits are low risk investments that offer higher interest rates than savings accounts at the bank.
For example, the highest current interest rates for savings accounts are 1.30% (Kiwibank), 1% (BNZ), 1.05% (ASB), 1.70% (The Co-operative Bank).
However, if you had $5000 to invest for 1 year, the current term deposit interest rates are 3.65% (Kiwibank, BNZ, and ASB) and 3.15% (The Co-operative Bank). Kiwibank has also just announced a special 4.00% rate if you have at least $10,000 to invest for 1 year!
While term deposit interest rates won’t outpace the current inflation rate of 6.9%, they are a safe, low risk fixed term investment where you are very likely to get back at least as much money as you put in. As an investment, term deposits are much less risky than property and shares, provide a reliable source of income (but not significant growth), and you don’t need a lot to start investing. (In fact, minimum deposits can be as low as $1000!)
If term deposits are the right investment for you based on your financial situation and goals right now, but you don't want to lock your money away for a certain amount of time, you can use the investing strategy of laddering.
How does it work?
Say you have $20,000, want to earn some interest on this, but might also need some of the money shortly.
Splitting this into 4 x $5000, you invest $5000 for 6 months, $5000 for 12 months, $5000 for 18 months, and $5000 for 24 months.
This may help to give you peace of mind as it gives your money accessibility and liquidity at regular intervals. You can then choose to re-invest the money, or have it paid out to you!
I hope this was a helpful beginner’s guide to term deposits! For more on term deposits, check out Sorted’s guide here.
Sophia
