We unpack why term deposits are costing you thousands and why leaving your money parked at 5% might be doing more harm than good. We explore the risks of relying on term deposits and alternative options to grow your wealth in today’s environment.
The Hidden Cost of Term Deposits
Term deposits are costing you thousands without you even realising. While many savers celebrate higher term deposit rates, these returns often don’t keep up with inflation. For example, even if your term deposit earns 7%, with inflation running at around 6%, your real return is only about 1% – and that’s before tax is taken off. After tax, you’re likely earning even less, meaning your money is effectively going backwards.
Term deposits might feel safe, but as discussed in the episode, this is often an artificial happiness. They give the illusion of growth while inflation quietly erodes your purchasing power.
Why Term Deposits Were Never Attractive
When it comes to the banking system, term deposits are structured to always earn less than mortgage rates – that’s how banks profit. Even when interest rates were high, term deposits weren’t particularly attractive, and now with rates coming down, their appeal is fading even further.
The hosts highlight that for those locking in term deposits for two, three, or even five years, it’s essential to understand that you could be missing out on greater growth elsewhere. As interest rates drop, the value you lock in today could limit your future gains.
The Real Risk of Playing It Safe
The podcast also discusses the hidden risk of playing it safe. Investing always carries risk, but so does not investing. Leaving your money in term deposits or cash ensures near-zero growth after inflation and tax. While it feels secure, it may cost you thousands in lost opportunity.
Many avoid investing in shares due to complexity or fear of market downturns. Yet shares are simply ownership in companies aiming to make a profit. Historically, despite market dips, diversified investments have outperformed term deposits in the long run.
Alternatives Beyond Term Deposits
If you’re questioning whether to stick with term deposits, the hosts suggest considering:
They emphasise the importance of knowing your risk tolerance and time frame, and not defaulting to term deposits just because they seem ‘safe’. Understanding what your money could achieve elsewhere is key to long-term wealth building.
Key Takeaways
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Term deposits often fail to beat inflation after tax.
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Banks structure term deposits to pay less than mortgage rates.
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Playing it safe with cash can cost thousands in lost opportunity.
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Shares and other investments carry risk but also potential for growth.
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Know your time frame and risk tolerance before locking in funds.
Next Steps:
Are you in term deposits at the moment and sick of low interest rates? Talk to a Lighthouse Financial Adviser to put a plan in place and set yourself up for a better future.
Ever wanted your own financial adviser? James is picking one listener to coach for a whole year – apply now and you might just star on the podcast too. Apply here!
If you’d like to learn more, check out these other episodes below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
