I read some words the other day on a UK government money website that ran like this:
“Don’t keep cash under the mattress. Your bed is great for many things but storing your savings certainly isn’t one of them.”
Now that made me smile but it also made me think about where you can put your money and where it earns the best return with the lowest risk.
In “the olden days”, a lot of people kept their money in their mattress, under their bed, in the attic or even under the floorboards because they didn’t trust banks. This was especially so after the 1930s Great Depression, when many banks in the US in particular went belly up. The US had (and still has) lots of small banks (in 2018 there were more than 4,700 American banks!) and when bad times hit, many of these went under, causing great distrust in the banking system.
It’s so different here in Australia. While there are lots of smaller banks popping up (most of which are online), we have what’s called the Four Pillars: Comm Bank, Westpac, NAB and ANZ, which act like a shield against a potential crisis.
To further increase consumer confidence in our banks, our Federal Government guarantees deposits up to $250,000 in what are called authorised deposit-taking institutions, such as banks (including online and digital banks), building societies, credit unions and others.
It’s well-known that having your money in a savings account is good if you have your wage put there and pay your bills via debit card or BPAY. But you won’t get much (if any) interest on a savings account.
Let’s say you’ve already saved $5,000 and want to put this somewhere but you’re not quite sure where (don’t even think of the mattress!). Maybe you’re saving for something in particular that you want to buy in a year’s time (like a car). You’re too scared to put it into the share market and wouldn’t know what shares to buy anyway. You don’t want to take the risk of losing this money if you don’t understand what you’re doing! So putting your money in a term deposit could be an option.
A term deposit is a low-risk way to invest your money and earn a fixed rate of interest. Notice how I say “low risk”, not no risk. Everything you do with your money comes with a degree of risk. Nothing is completely safe and risk free but as I said, your first $250,000 is government guaranteed (as long as the government doesn’t go bankrupt! Just joking!). A few years back, the Greeks were worried about their banks, but here in Australia, our Big Four mentioned above are in the top 50 banks in the world.
A lot of people like locking away an amount of money (usually the minimum amount is $5,000) in a term deposit for a certain time, between one month and five years. You’ll get a guaranteed rate of interest for whatever term you select, so you’ll be able to calculate how much you make on this investment. And generally, the longer you leave your money in a term deposit (or TD), the higher the interest rate you get.
If you need your money before the term ends, you have to pay a penalty fee and generally have to give 31 days’ notice. And here’s a tip: always check the terms and conditions to see how much that penalty fee will be.
While a term deposit is a ‘safer’ option and definitely comes with advantages, unfortunately the rate of interest on a term deposit is unbelievably low nowadays. In the 1980s, term deposit rates were over 10% so you can see why they were popular!
Some people look at these current low rates and decide to go into other deposits that offer 4% or more. But here’s a strong word of warning: these products can go bust. So be really careful if you go looking for higher rates of return.
Always remember this: the higher the return that’s offered, the higher the risk. That’s an indisputable fact!
7 questions to ask your bank about term deposits:
- How much do I need to open a term deposit?
- What is the best rate you can offer?
- How long is the term I need to lock my money away for?
- Is interest paid each month, year or when the term ends?
- Are there any set-up or account fees?
- Will you let me know when the term ends and not just roll it over into another fixed term?
- What’s the penalty fee if I need to get my money out early?
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
