What exactly is a term deposit, and how does it work? We’ve put together a guide to understanding all things term deposit – that includes how they can play into your financial planning, how they differ from other types of investments, and how to pick the one that’s right for you.
Term deposits in a nutshell.
Term deposits are products designed to help you grow your money over a specified ‘term’, or time frame, at interest rates higher than a standard savings account. You agree ahead of time on specifically how long you’re going to keep your money in the term deposit. It could be anywhere between 30 days and 5+ years.
On the day of its maturity, you’ll get a return in the form of interest. It’s kind of like a term deposit birthday, except instead of getting a slice of cake to celebrate, you’ll get a nice return in the form of interest. Now, that’s a present we can get behind.
For example, if you were to put $10,000 into a term deposit at 2.7% interest for a 12 month term, you’d end up with $10,270 after the 12 months. That’s an extra $270 you wouldn’t have made if you had kept it in a standard chequing account.
And thanks to the power of compound interest, you can build wealth by earning interest on the interest you make. So the longer it’s invested, the better (read: more) return it gets. You work hard for your money. So your money should work hard for you.
When you’ll get your money back.
Term deposit features vary, but in most cases you can’t access the funds before the agreed term or duration is over without a penalty. In return, you’ll get a guaranteed rate of return over the term. Redeemable term deposits are also available, but the rates usually aren’t as high as locking into a non-redeemable term.
How they’re different from other investment types.
We like to think of financial needs and events in your life as three separate boxes – the short-term box, the medium-term box, and the long-term box.
In your short-term box, you’ll want to keep 3-4 months of contingency savings – that’s your savings account.
Your long-term box typically has any retirement investments, like mutual funds and registered savings.
You also need a medium-term box to address the ‘everything-in-between’. That includes things like putting funds aside for things like a special vacation with the fam jam, a new car or even the down payment on a home. Term deposits are a great option for these medium-term financial needs because they’re tied to a specific length of time that you have control over.
How to tell which one is right for you.
The great thing about term deposits is that your investment is guaranteed. What you’ll need to consider is when in your medium-term time window you’ll need to access the funds, because that will determine the best term length (and rate) for you. You can get penalized for withdrawing funds from a non-redeemable term deposit before its maturity date. Be sure you don’t need the funds for a certain length of time.
Another great thing about term deposits is that they’re flexible. You can incorporate them into your RRSP portfolio, as well as other registered products like RESPs, TFSAs, and RRIFs.
P.S.: Term deposits can be used for long-term goals as well. They’re a good way to add diversity to your investment portfolio and since they’re guaranteed, they are a more conservative investment option than mutual funds.
Be sure to read the fine print.
It’s important that you read any disclaimers so that you know exactly where you stand on a number of issues. Even if you’re a term deposit pro, terms can change. You don’t want to be left in a sticky situation. Keep in mind things like maturity conditions and early withdrawal penalties.
Also, be clear about the rules for an automatic renewal of the term deposit. In some cases, your term deposit might be set up to reinvest when it matures if you don’t let your financial institution know you want to cash it.
OK, I’m ready to invest.
High fives! If you think a term deposit is the right solution for you, check out our latest term deposit offers.
Need a hand? No problem. No matter what stage of investing you’re in, our accredited Investment Team can help. We’ll help you assess your unique goals and make sure your money is working as hard as possible to get you there. Give us a shout.