Understanding Term Deposits: Be Money Smart

So you've managed to put aside some cash - what now? Money stuffed into a mattress doesn't grow. But money deposited for a fixed term, or in a high interest account, works for you by earning interest - and is also a lot safer. The longer you leave your savings in an appropriate account, the more you'll make.

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.

Or, you can take your earnings and re-invest the principal. A further option is to re-invest both the original amount and the additional income - and roll it over for the same term.

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? Term deposits work just like a typical savings account, but depositors are given additional benefits of earning a higher interest rate, thus the name.

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. As far as the interest earned is concerned, a long-term deposit will generally earn a higher profit at the end of its term as compared to storing the same amount of money on a high interest savings account. 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. What is important is for you to choose a financial option that will allow you to securely store your savings for the rainy days.

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.