A term deposit is basically a bank account that earns interest and has a set maturity date. These are sometimes called time deposits, and certificates of deposit (CDs) are among the most common examples. These can be a good savings vehicle and will earn higher interest rates than a standard savings account. The catch is that the money must stay in the account until maturity in order to receive the full interest. If money is withdrawn before the end of the term, you’ll face an early withdrawal penalty. When interest is at lower rates, this penalty is often negligible, but with higher rates, it can be significant.
The frequency at which you’ll receive interest on your term deposit will depend on your financial institution and type of deposit. Some will offer monthly interest rates, and some will require you to leave funds for the whole term before receiving interest. CDs with monthly interest payments do offer compounded interest, but they tend to have lower interest rates to offset this. While CD rates won’t offer the same high-profit potential of the stock market or other investment options, they are safer and can perform well over a long period of time. It’s best to learn how to find the best term deposit rates before investing.
Short-Term Deposits
With short-term CDs, a depositor leaves their money in for up to one year. The money may be left in for as little as one month, but it’s most common to see 3-month, 6-month, and 1-year CDs. These deposits offer the general benefits of short-term investments in that they’re low-risk, and you’ll have quick access to your money. A 12-month CD can be a good choice for people who have specific financial goals they want to accomplish soon but just need a little more money. They can also be a great idea if you’re not sure what to do with your money yet. Why not have it work for you for a while before you decide how to spend or invest it further?
It’s generally best to go with monthly interest for these deposits. While you can receive every months’ worth of interest in a separate savings account, you’ll get higher returns if you let it compound in the CD itself.
Long-Term Deposits
A longer-term deposit can be anything from a 1-year CD to a 10-year CD. Since long-term CDs lock your money away for so long, they’re best suited to people with long-term investment goals or to people who have sums of cash that they’re certain they won’t need to spend. Generally speaking, the longest term CDs also have the highest interest rates. This makes long CD terms great rivals to high-interest savings accounts. Some high-yield savings accounts will require you to make additional deposits each month to continue earning interest, but with a long-term CD, you can simply make your initial deposit and leave it alone.
This type of CD is a safe way to get better rates and offers peace of mind to investors who want to save without risking their capital. Just be aware that you may face harsher early withdrawal penalties for a long-term CD.
Alternative CD Options
If you aren’t comfortable with the traditional options, there are a few other types of CDs. Here are a few of the most popular.
Advanced Notice: These CDs let you make withdrawals before your term ends so long as you provide 31 days’ notice beforehand. This combined with their competitive rates makes them increasingly popular, though they still require some level of financial planning.
No Notice: As the name suggests, these term deposits let you make withdrawals at any time. While this may sound advantageous, their low-interest rates don’t make them much better than savings accounts.
Low Balance: Most term deposits require a minimum balance before you can invest, but a low balance CD generally lets you invest with under $1,000. Some low balance deposits have no balance requirements at all. These can be a good option for young investors who don’t have much capital but want to accrue some interest anyway.
