Term Deposits – should you even bother?

This article was written by Elise Vollweiler for the Motueka Guardian in March 2021

If you squint a little, the five-year graph slants down like the eyebrow of a scowling cartoon character.

If you’ve recently put money into a term deposit, you can probably relate to that hypothetical cartoon character. 

Interest rates are currently sitting at around one lowly percent, so close to zilch that they might as well be having a nap on the x axis.  

In terms of interest, that means there’s not much difference between putting your money in a term deposit and tucking it under your mattress.

So should you even bother?

Well, yes – with a couple of caveats.  

“The problem isn’t term deposit rates as such,” explains Castle Trust Financial Planning’s Glyn Lewis-Jones.  “The problem is the way that term deposits are used, and the extent to which they are used.”

Until you are ready to use your money, it needs to be stored.  One percent is still better than nothing, so term deposits are a perfectly acceptable place to keep your money in the short term – but this should be restricted to the cash that you’ll be needing to access in the next few years.   The rest should be invested in a globally diversified collection of shares which historically have seen rates of return several times higher than term deposits. 

“Term deposit money should be used specifically for the short term,” Glyn says.  “It’s just there for security. The interest rates don’t really matter, because it’s going to be there for less than five years.”

Putting your long-term money in a term deposit actually devalues it, says Glyn.  Not only are rates currently less than inflation, but in fact they are always below inflation, because they move up and down relative to inflation.  In the short term, this doesn’t have much of an impact, but over a period of decades, the forsaken returns are a significant lost opportunity.

What about the risks associated with the share market?  Isn’t that gambling with your nest egg?

Only if your nest egg is all in one basket, says Glyn.  Provided the money is invested across a wide platform, the share market is a sensible place for your longer-term funds to be.  As he points out, on average the market recovers from a slump within two years, which is well within the short-term five-year safety net.  

So what’s the summary?  Shares beat term deposits in the long run, term deposits are a sensible holding zone in the short term… and there is little to recommend stashing cash under your mattress. If you want to talk term deposits or discuss how to make your money work harder for you both now and in the future, call in and see the team at Castle Trust Financial Planning, on Motueka’s High Street.