Calculating interest daily unlocks the power of compounding. It's a big advantage.
When you invest your money in a term deposit account you know that you'll be getting a definite amount once the account matures.
How do term deposits work?
Most term deposits last from 30 days to five years (that's 1 to 60 months) and many people are attracted to these savings accounts because the interest is fixed - it won't go down during the period the money is locked in. This offers security and the opportunity to make definite plans for your money.
It's important that you leave the money in the account for the full length of the term so that you get all the interest that's coming to you. Unlike regular savings accounts, term deposits need the money to stay in in order to get the best returns. If you withdraw some or all of the money early, you'll lose some of the interest that you've earned.
Is there any way to improve the returns on a term deposit?
Many term deposits only use simple interest. The interest is generated from the principal - or opening - amount; it doesn't grow at a faster rate even though the balance in the account is larger thanks to the interest.
Other banks use compound interest in their term deposits, so interest is applied to both the opening deposit and the increasing amounts of interest that are generated. This means the money grows at an increasing rate over the life of the account.
To really make this compounding work, you need to look for a bank which calculates its term deposit interest daily. Most banks use daily interest on their term deposits, but a few don't.
ANZ, UBank, NAB, My Life Finance and RaboBank are examples of banks that calculate term deposit interest daily.
What is daily interest?
Daily interest is, quite simply, a method of calculating the interest earned on a balance and applying it to the balance every day. As the interest is calculated and added to the balance daily, the compound interest can get to work on these additions immediately, giving you a better return at maturity.
Have a fiddle with a term deposit calculator to find out what amounts, rates and terms will work best for your aims. You need to strike a balance between the amount of money you can afford to lock up, how long you can lock it up for and the different interest rates you'll get. Your rates generally improve as the term lengths increase as the bank has longer to bring its own investments and projects to fruition with your money. However, if you think three, four or five years is too long to do without your windfall, then you'll have to go for a shorter term and make do with a lower rate.
Which banks have the best term deposit rates?
Very often, it's the smaller banks that have the better rates because they have to compete with the Big Four - ANZ, NAB, CommBank and Westpac.
It's always best to use a comparison site to compare term desposits or any other financial product. The temptation for many people is to simply stick with their current provider, which is often one of the Big Four, but there are some great rates out there among the smaller institutions. Here are some great products with daily interest calculations.
My Life My Finance offers term deposits of one to 24 months, with interest rates of 2.00 per cent for all but the longest term. If you're an existing customer you'll get a bonus rate of 0.10 per cent on top and the minimum deposit amount is $5,000.
The online bank UBank (owned by NAB) has a range of term deposits and is well - known for offering the only green term deposit on the market, which gives investors an additional 0.05 or 0.10 per cent on the existing interest rates. The UBank personal term deposit offers terms lasting from one month to one year, with rates varying from 1.35 per cent to 1.80 per cent. The minimum deposit is $1,000, which makes it a great starter investment.
NAB offers term deposits ranging from one month to five years in length and you can earn up to 1.60 per cent interest for the longer terms. You'll need a minimum deposit of $5,000, but you can open the account online and there are no set up or monthly fees to chip away at your earnings. If you're interested in farm management deposits then you'll find the rates at NAB very attractive too, earning you between 1.85 per cent and 1.95 per cent for balances between $10,000 and $800,000
Rabobank also has some attractive rates for balances between $1,000 and $2,000,000. The terms range from one month to five years and you'll get 1.70 per cent for one year and 1.65 for five years. If you reinvest your money into the term deposit before maturity, you'll get a bonus of 0.10 per cent on your interest
The advantages and disadvantages of a term deposit
A term deposit is an ideal low - risk investment or savings vehicle because once the money is in, the interest does the work. You don't need to do anything else apart from wait for it to mature.
You don't have easy or instant access to your money once it's locked in, which can reduce the temptation to dip into your savings.
You're guaranteed a stable rate of interest throughout the term as it's fixed. This means that it won't go up or down with the cash rate and you'll know what you're getting back at maturity.
On the other hand, that fixed interest can leave you feeling frustrated if the cash rate goes up and your money is languishing at a lower rate of interest for the duration.
The lack of easy access can be problematic if you need the money in a hurry. You can get to it if you give notice, but you'll lose some of your earnings.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.
