How a term deposit can earn you extra savings

What's the point of a term deposit? Despite my role as a finance journalist, I was recently stumped in answering this question. 

Why should a 27-year-old consider depositing thousands of dollars for several years? After all, most of the older Gen Z generation–myself included–only have an average of $7,000 in savings at a given time, according to Westpac data.

So I decided to deep dive into why young people might consider term deposits.

What is a term deposit?

A term deposit is a low risk investment that many financial institutions offer. Think of it as a locked saving account with higher interest rates. You put away a large sum of money for a period of time (a month to five years), then the money sits there earning you interest that can either be paid monthly, annually or at maturity. 

Unlike savings accounts, term deposits require a high minimum balance to open. This could be anywhere from $1,000 to $5,000. Also, remember that you don’t have easy access to the money while it sits in the term deposit. 

So, what’s the benefit?

How term deposits work

What happens to your money while it sits silently in a term deposit account? Let’s look at some examples below.

Steve has received a $25,000 inheritance from his grandparents. Rather than spending it, he wants to put it away in a term deposit so it earns some interest. He used our term deposits calculator and saw that after five years he’d earn over $5,000 with a 4.15% p.a. interest rate–the highest in our database.

However, Steve thinks five years is too long to not have access to his inheritance. So instead, he puts his money into a 1-year term with an interest rate of 2.90% p.a.

While $725 doesn’t look like much at a glance, consider the difference with a standard savings account. If Steve had put his $25,000 in a savings account with an average ongoing interest of 0.50% p.a. and no additional requirements, it’d have only earned him $125 in the same year. 

So if Steve isn’t looking to touch the money for a long time, putting it in a longer term deposit might be a better option.

Should I get a term deposit?

It depends! If you’re like Steve, with a massive inheritance, a term deposit could help provide a safe place to stash it and earn you extra money too. 

Everyone’s situation is different, so double check what is doable for your finances and needs. 

If you feel like you need more information about term deposits before committing to one, get stuck into Mozo’s term deposit guides. Alternatively, you can start comparing term deposits below.