People with extra money wanting to secure their finances can decide between investing their cash or placing their money in the bank. Those who wish for the safest decision opt for the latter. While the security of money is guaranteed in a bank, its growth is not. With inflation taken into account, your money would just lose value this way.
What Happens to Money in the Bank
A term deposit is a type of deposit account that safely keeps the money for a certain period. While the agreed length of time or “term” is not yet over, the depositor cannot withdraw their money. In return, they get a guaranteed interest rate based on the agreed term. As they keep their money, it earns a little through the interest.
While it does sound good, it is not as perfect as it appears. The downside of this option is how little the growth of your money could be. In Australia, banks’ average term deposit rates are typically around 1.20 to 2.5 per cent, which is almost close to the yearly inflation rate.
That is the reality of the setup, yet more people are still left to accept the poor conditions offered by the banks. Also, the majority are not aware of what they can do to improve their money’s chances, but there are ways to improve it.
What Happens to Your Time Deposit’s Interest
When account owners put their money in a time deposit, two things usually happen:
- Standard Rate VS Special Rate
The bank would explain to the client that they can get a special rate, but at a cost. A standard rate would still apply if they decide not to get the special rate, so their money is guaranteed not to sleep. Let us say the special rate is at three per cent, and then the general rate would usually be two per cent.
Surprisingly, more people would choose the latter since the difference does not appear to be that big, plus no additional charges are necessary. However, one per cent already makes a big difference, especially when you put the deposit duration into the picture.
In short, unless the account owner requests for a special rate or ticks the box asking for the special rate to be applied, the standard rate would still be the default interest rate.
- The Special Rate Trial
In some instances, banks let the depositors enjoy the special rate for a few months and then drop the inflation rate to the standard after. Similar to the abovementioned, unless the client asked to continue the special rate, they would convert and stay at the default rate. Account owners are usually unaware or do not want to undergo another paperwork again.
Do These Before Signing Your Bank Rollover Letter
Some people may claim that they do not know, but banks always ensure that their clients are well-informed at all costs. That is why a rollover letter exists. This document is the agreement that sets out the terms and conditions of one’s deposits. Before you agree and place your signature on it, make sure that you do the following first:
- If you do not want the standard term of the bank applied to your deposit, make sure that you review the document correctly. Tick the option that says you want to roll over the same term (special rate) on maturity.
- If you are not satisfied, call your bank and request a higher rate, back up your request with data of the highest rates available from other banks.
- Check for penalties in the terms and conditions and take note of them.
- Going for a longer-term time deposit often gives better results.
- Check other investment options for possible alternatives.
Conclusion
People place money in banks in the hopes that their hard-earned money will grow over time. While it is the safest route, you need to do your part in ensuring that you get the best deal possible. If the terms do not meet your standards, you are free to look elsewhere and check for better options.
New Wave Financial Planning is here to help you find the best approach to achieve your desired outcome. We help our clients build their wealth and manage their finances. Contact us for more defined finance tips and tricks regarding your investments.
