Saving by keeping your money at a bank with a guaranteed annual interest rate is a good decision. One of the most common ways people in Australia choose when it comes to such saving is a term deposit. This method allows storing cash safely as it is based on an agreement between you and your bank that guarantees a certain amount of interest you receive within a fixed period of time.
However, there are many factors one needs to consider when deciding whether to invest one’s money using this method. Term deposits come with certain risks that should not be ignored to avoid negative consequences.
Costs of Being Too Conservative
Lower Returns Compared to Alternative Vehicles
The first and foremost disadvantage of the discussed financial product is that it usually provides lower interest rates. As this kind of saving is rather safe for a bank, the institution will not give you extra bonuses in exchange for your commitment. Compared to the Australian stock market, buying properties, or mutual funds, you will earn less money on average.
Inflation Risk
As a result of low interest rates provided, there is also an inflation risk that cannot be overlooked. Indeed, the cost of living in Australia increases gradually. If your interest rate is lower than the present rate of inflation, your earnings from your investment would be insignificant in real terms. You might think that your bank pays you the interest, but the purchasing power of your money will diminish.
Opportunity Cost
Being engaged in a contract, one faces a risk called opportunity cost. Financial markets evolve quickly and constantly. An investor always has a chance to invest in different assets, but it is only possible if there is enough money at his/her disposal. In case of being committed to a certain deposit account, a person will not be able to seize opportunities appearing in the stock market.
Inconvenience of Term Deposits
No Adaptation to Changing Conditions
Unfortunately, term deposits come with no flexibility. Banks’ rules and interest rates remain stable. One is not able to change the contract terms after the conclusion. Thus, you will not be able to take your money out to cover your unexpected expenses. Life situations may change abruptly.
Punishment for Changing Your Mind
If it turns out that you need more money than expected, you will be forced to terminate the contract and withdraw your cash earlier. But, this means that banks will apply some penalties to you. As a result, you will get much less interest from the account than initially expected.
Risk of Reinvestment
If your term deposit finishes soon, but interest rates are still relatively low, then your reinvestment rate will also be rather low. In addition to that, you will have to open another term deposit and pay for it in advance. In this way, your savings process may slow significantly.
Conclusion: Is It Suitable for You?
To conclude, it should be mentioned that a term deposit from reliable sources like ING is not necessarily bad for everyone. It is especially convenient to use in case you are going to spend your money in twelve months on a down payment to buy a flat, for example. However, if your financial goals require long-term savings, you should consult a professional financial advisor.
