They go by many names: term deposits, CDs, time deposits and fixed deposits. No matter what you call them, they can sometimes be the forgotten investment. While many people prefer the prestige of the stock market or the simplicity of a dividend-bearing savings account, a term deposit* is a great balance between the two.
What is a term deposit?
In exchange for a higher dividend rate, term deposits commit you to invest money for a certain amount of time. Choose a term from as little as six months to as long as five years. Dividend rates will typically increase with longer terms while penalties will be assessed if you access the money before the term expires.
What are the rates?
The dividend rate—which differs by institution—is the rate at which you’ll earn dividends for the life of the certificate. You’ll also probably see an APY rate, which stands for “annual percentage yield.” The APY rate is usually a little higher than the dividend rate because it takes into consideration the effects of compound dividends (the principal amount plus any dividends gained in previous periods).
Is short- or long-term better?
To answer this question, you must think about two things: when you need the money and if you think rates will go up or down. If you’re saving for a vacation, make sure the term you choose coordinates with the deadlines of your trip. If you’re saving for college tuition and your child is small, choose a longer term to get a higher return. As far as rates rising or falling, do your research or speak with a financial advisor to estimate any trends.
Consider using a strategy called laddering where you stagger the investments. This gives you regular access to your money while still being able to take advantage of the higher dividend rates offered from long-term deposit accounts.
*Early-withdrawal penalties may apply. Accounts terms available from six months to five years. Membership required—based on eligibility. Federally insured by NCUA.
