The Pros and Cons of Fixed Term Deposits
Fixed term deposits are considered the safest and wisest way of putting money into savings with a financial institution. Fixed term deposits are simply deposits that are scheduled to be held for a predetermined period of time, during which interest accumulates and the account holder generates a small amount of profit. Since the time period of the deposit is specified at the time the account is opened, the bank can safely offer higher interest rates without risking default. Anyone who needs to park a few thousand dollars in a savings account for a few years’ time should consider the following pros and cons of fixed term deposits.
The Pros of Fixed Term Deposits
The most obvious benefit of a fixed term deposit is the high interest rates offerred with this type of bank account. The interest rates associated with fixed term deposits are usually fixed when the account is opened, and remain at that rate throughout the duration of the deposit. Term deposits that are set for longer periods of time will usually carry higher interest rates, as the bank will have more time to invest the funds during the term deposit.
Although there are restrictions in place to prevent early withdrawals, the money in the account remains an asset and can be used to acquire financing for loans or other purposes. Term deposits are typically insured, which makes them one of the safest ways to invest and save money with a bank. High fixed interest rates, security, and assurance are by the far the most notable pros of fixed term deposits.
The Cons of Fixed Term Deposits
The obvious disadvantage of a fixed term deposit is that the funds cannot be withdrawn for a certain period of time without incurring a hefty fee. In fact, many financial institutions will penalize account holders with hundreds of dollars in fees in the event of an early withdrawal. Higher term deposits usually carry larger early withdrawal fees.
Another disadvantage of fixed term deposits is the instability of these accounts in relation to inflation. Any fixed term deposit could quickly go from being profitable to a loss if inflation rises by just a couple of percentage points. With inflation being such a common problem in the Australian economy, it is easy to see why many people opt for shorter term deposits with only a few thousand dollars. Nonetheless, in the right economy, with the right financial institution, it is possible to open a profitable fixed term deposit account without the fear of inflation.
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