By Joseph Lanteri, Co-CEO, Lanteri Partners Group
Term deposits get a lot of attention when markets feel shaky and interest rates are moving. The honest answer to whether they are better than the alternatives is that it depends on what the money is for. They are a handy tool, not a cure-all, and they work best when you know exactly what job you are hiring them to do.
What a term deposit is actually good for
A term deposit suits money you will not need for a set period, where certainty matters more than flexibility or the chance of higher returns elsewhere.
The big drawcard is predictability. You know the interest you will earn over the fixed period before you commit, which makes it easy to plan around.
There is also a safety net. Eligible deposits with an Australian authorised deposit-taking institution (ADI) are generally covered by the Financial Claims Scheme, up to $250,000 per account holder.
Investments like shares can offer higher potential returns, but they come with more risk and more ups and downs. A term deposit trades some of that potential for certainty. Neither is automatically better. The right choice comes down to when you need the money, what rates and conditions are on offer, and how much risk you are comfortable with.
Do uncertain times make term deposits more valuable?
They can play a useful role. Term deposits can add a more defensive layer to a diversified investment strategy. If you think markets could stay unsteady for a while, they are one way to shelter part of your money from sharp market movements.
The RBA has lifted the cash rate several times this year, and savings rates have generally followed, which has made term deposit returns more attractive than they were.
Rising rates are a double-edged sword, though. If you lock in during a rising rate cycle, your rate is fixed for the full term. If rates keep climbing, you may have been better off leaving your money in a high interest at-call savings account with a variable rate.
Benefits people often overlook
Certainty helps you plan. If you are setting money aside for a known future expense, you can work out the interest you will earn in advance.
Built-in discipline. Limited access keeps your savings quarantined. If you cannot touch it easily, you are far less likely to spend it.
Protection if rates fall. If rates are heading down, locking in a higher rate for a longer term can work in your favour.
Drawbacks people often overlook
Locking in too early. As above, committing early in a rising rate cycle can mean missing out on higher earnings, with no extra safety compared with a variable at-call account.
The $250,000 limit is per ADI, not per account. The Financial Claims Scheme limit applies per account holder, per ADI. Splitting money across several accounts at the same institution does not increase your cover.
Limited access cuts both ways. The same discipline that keeps your money untouched becomes a problem if you need it early. Breaking a term deposit usually means giving up some or all of the interest you have earned.
The bottom line
A term deposit is worth considering when you have money you will not need for a known period and you value certainty over flexibility or higher potential returns. It is not automatically better than other options, and it works best as one part of a wider strategy that reflects your goals, your timeframe and your appetite for risk.
If you would like to talk through where a term deposit might fit in your plan, book a free Wealth Chat with our team.
This article contains general information only. It does not take into account your objectives, financial situation or needs. You should consider whether it is appropriate for you and read the relevant product disclosure statement before making any decisions. Lanteri Partners, ABN 88 060 748 594, Financial Services Licensee No. 239127.