Right now, we are seeing a very low-interest environment. Savers looking to earn a decent yield are finding it hard to earn high enough rates to stave off inflation, much less see any sort of solid return.
If you are looking to better preserve your capital, earning a little bit more on your cash, you can consider term deposits.
What are Term Deposits?
When you agree to keep your money in a specific account for a fixed period of time, you are making a term deposit. In Canada, you can put your money in Guaranteed Investment Certificates (GICs). In the United States, the most common term deposits are Certificates of Deposit (CDs).
With a term deposit, the financial institution can use your cash for various purposes, and pays you interest to do so. The yield paid to you for the privilege of using your money is normally a little higher with a term deposit than it would be with a regular deposit in a savings account.
Get a Better Yield with a Term Deposit
The reason that you receive a better yield when you choose a term deposit account is due in large part to the fact that your money is essentially locked up. You are supposed to leave your money in the account for the set period of time. If you withdraw money before the end of the specified term, you might end up paying penalties. The fact that your money is locked up and committed to the bank for a set period of time encourages banks to pay you a higher rate of interest.
There are two main ways that you can increase the amount of interest you earn with a term deposit account:
- Length of Term: The longer the term, the higher your yield. An account with a term of five years normally earns a higher interest rate than an account with a term of two years. The longer your term, the more you will be paid in interest.
- Amount of Deposit: While there are several financial institutions that don’t require minimums for an account, there are plenty of accounts that require you to deposit at least $500 in order to take advantage of a time deposit’s higher rate. Generally, the more money you put into one of these types of accounts, the higher your interest rate is likely to be.
If you want a better yield from your time deposit, you should find out the best rate for the amount you can put in for a deposit. There are a number of web sites that can help you compare rates and minimums, and find the best fit for you. You can even create a ladder to reduce the risk of even lower interest rates in the future.
Remember, though, that your higher deposit and longer term come with a price. You won’t be able to access your money without paying a penalty, so the money you deposit it any time must be money that you can afford to have locked away.