Term Deposits

While savings accounts typically allow you to deposit and withdraw any amount of mony at any time a term deposit locks your money in for a specific period of time.

In some countries it is possible to get term deposits for any number of days up to 5 years.

Interest can either be accumulated, or it might be credited to a different account, or it might be added to the term deposit on a regular basis e.g. at the end of each quarter or each day.

Usually, the interest is higher the longer the money is locked in. It is, however, also possible that you might get a higher interest for let's say a one-year deposit. Banks assess their portfolio of deposits and apply certain rules to the terms of all of them. If a bank decides that they would like to have more deposits with a term of one year, they might offer a higher interest as compare to a two year term.

Also, the interest tends to be higher the more money is put in. "More" typically means quite a substantial amount.

In all cases it pays off to go shopping for the best interest for the amount of money you want to deposit and for the term you prefer. Tell them what the competition has offered. You may want to gamble by increasing the interest slightly.

Please note that it might not be possible to get the money back before the end of the term. If it is possible you typically have to pay an additional fee or have to accept a lower interest. Keep that in mind when you select the term for your term deposit.

Recommendation

If you would like to park some cash in term deposits, it might make sense to split it up, e.g. into three tranches. One with one month term, one with a 6 months term, one with a 12 months term. The idea is to balance between having easy access to the money and enjoying a high interest rate for your deposit.

Example: Let's assume you have set up for yourself the rule that you would like to hold 10% of your financial assets in cash. You want to park the cash in term deposits. Then one option would be to put 50% into a one-month deposit, 30% into a 6 month deposit, and the rest into a 12 month deposit.

Related Topics

Some brokers or banks offer Money Market Funds with daily maturity. This means you can add or reduce funds on a daily basis without penalty fees. Money Market Funds might therefore be an alternative to term deposits for parking money.