Term Deposits: Are They Worth It?
Interest rates in New Zealand have been on the rise lately, and while this may be bad news for borrowers, it is great news for savers. With all banks now offering over 5% on a one-year term deposit, Heartland bank has even gone as high as 5.7%. As a result, many people are considering putting their money into term deposits to take advantage of these good rates. But is this a good idea for everyone?
It’s important to keep in mind that term deposits go in and out of fashion just like anything else. Back in 2008, it was possible to get 8% for a term deposit, while in 2020, lucky savers could only get 1%. Now, however, we are back to 5%. But why did people start to turn away from term deposits in the first place?
In 2020, conservative investors were put off by the paltry returns on term deposits, so they began to turn to other options such as shares and investment properties. However, this worked out great for those investors who were able to make a 20% return in 2021. But as the share market came back down to earth in 2022, those who were unable to handle the volatility panicked and moved their money back to cash, where they should have stayed in the first place.
So, if you’ve lost 10% in 2022 and don’t want to risk losing your life savings, seeing a 5.7% term deposit for 12 months might seem like a great opportunity. However, the question you need to ask yourself is, what is your timeframe for investing?
What’s Your Timeframe?
If you plan on using your cash within the next 12 months to buy a house, a car, or go on a holiday, a term deposit is a great idea because it provides a guaranteed return. However, if you’re a long-term investor, it’s not recommended to put your money into cash.
Why not? Investing in managed funds or property will have periods of good returns and poor returns, but over the long term, you will grow your wealth. With a term deposit, you’re locking in your money for a fixed period of time, and you won’t have access to it until the term is up. While this can be a good option for short-term goals, it’s not the best option for long-term investing.
In conclusion, if you have a short-term goal and want to take advantage of the current high interest rates, a term deposit might be a good option for you. However, if you’re looking to grow your wealth over the long term, it’s best to consider other options such as managed funds or property. As with any investment decision, it’s important to do your research and seek advice from a financial professional before making any decisions.
