Why I rate term deposits for investing

25 Jan 10 / Posted by: Jessica

With all the talk of property slumps, sharemarket crashes and bank bailouts it can be hard to know exactly where to stash your hard-earned cash these days.

Supposedly confidence is now returning to the economy but until we believe it, a high interest savings account or term deposit is probably the best alternative to that sock under your mattress in the meantime.

As the name suggests, a term deposit is a type of account where you bank a lump sum for a fixed timeframe – usually between 30 days and five years. The bank guarantees to give you your initial investment back, plus interest (minus tax) at the end of this period when it “matures”.

Term deposits won’t give you the really high returns that shares or property may achieve in the long-term, but they also don’t come with as much risk – especially if you stick to the ones that have a government guarantee. The fact that you can usually access your funds if you need to (most banks allow you to “break” the investment before the due date albeit with a penalty in the form of reduced interest) can also be useful.

Of course, if you get an unexpected cash windfall and you do have a mortgage, it’s almost always in your best interests to pay that debt off first. That’s because the interest you’re paying on your mortgage is higher than what you’ll earn on any money sitting in the bank. But if the mortgage is paid, or you just want to know what to do with short-term emergency funds then here are some tips:

Research term deposits from a range of banks

The days when a lifetime of loyalty to one bank was rewarded through preferential treatment are long gone. Shop around for the best deal you can get even if it means moving away from your everyday bank. And don’t be afraid to try to haggle for a higher interest rate or better terms than what they’re advertising. The website www.interest.co.nz has a useful list of up-to-date interest rates for all the banks, along with a calculator to help you find the best deal.

Take more than just the interest rate into account

As with mortgages, the interest rate isn’t the only thing to take into account when choosing a savings or term deposit account. Length of investment, any fees or criteria, and the timing of interest payments are all things you should consider carefully.

Negotiate to get your interest paid sooner than “at maturity” if you can

Interest calculated and added to your initial lump sum on a monthly, quarterly or even six-monthly basis will mean you earn interest on your interest and make more money than if you’re just paid interest when your investment matures at say, 12 months.

Check the fees and charges

It goes without saying that you must check the small print. In most cases you won’t pay anything for a term deposit – unless you try to withdraw your funds before the investment matures. Many banks will let you do this, but they’ll reduce the interest you earn as a result – often by around 2%, which may mean you get less than if you’d just left your money sitting in a day-to-day cheque account.

Check the Crown Retail Deposit Guarantee Scheme covers your investment

Until 31 December 2011, you have the added security of knowing that term deposits which are covered by the Crown Retail Guarantee Scheme are guaranteed by the New Zealand Government up to a maximum of $1 million. Visit www.treasury.govt.nz for further information on the scheme.

Try a slice of PIE

Portfolio Investment Entities or PIEs are a relatively new investment option, which are often promoted by banks as an alternative to standard term deposits. They are essentially a type of managed fund with an advantage in that investors’ interest is only taxed at the comparatively low rate of either 19.5% or 30%. This can make them very attractive but as with any investment check the fine print, as they may not be covered by the same
guarantees as standard term deposits.

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