Short term deposits

A term deposit is a fixed interest savings product that lets you invest your money for a set period and with a set maturity date. 

They are offered at different lengths but you may find that depending on your goals, a shorter term deposit is more appropriate. Let’s get into the specifics below. 

A short term deposit is a fixed-term investment where you commit your funds for a brief period, usually from 1 month to 1 year, in exchange for a fixed interest rate. The interest rates are determined by factors such as the term length, deposit amount, and market conditions. At the end of the term, you can either withdraw your initial deposit with the accrued interest or roll over the funds into a new term deposit. 

Your first instinct with a term deposit might be to lock in a high interest rate at the longest possible maturation date (which is 5 years). However, your financial situation or goals should be top of mind when deciding how long you want to lock in rates for.

Let’s have a look at some of the pros and cons to help you decide whether a short term deposit is what you’re looking for:

Advantages of Short-Term Deposits

• Flexibility: With shorter commitment periods, short-term deposits provide greater flexibility than long-term options. This is particularly advantageous if you anticipate needing access to your funds in the near future.
• Goal-oriented saving: Short-term deposits are an excellent tool for achieving short-term savings goals, such as saving for a vacation or a major purchase. By securing your funds in a deposit, you minimise the temptation to spend prematurely.
• Withdrawals: In the event you need to withdraw money, short-term deposits often are easier to wait out until maturation. 
• Opportunity for growth: Upon maturity, short-term deposits allow you to add additional funds to your principal and reinvest for another term. This strategic reinvestment can lead to increased earnings, especially if you secure a favourable interest rate.
• Adaptability to market conditions: Short-term deposits mitigate the risk of being locked into a low-interest rate for an extended period. As market conditions fluctuate, you can take advantage of rising interest rates more frequently.

Disadvantages of short term deposits

• Lower interest rates: Generally, shorter-term deposits tend to offer lower interest rates compared to long-term options, potentially limiting your overall earnings.
• Temptation to spend: With shorter terms, the opportunity to access your funds arises more frequently. This may pose a challenge if you're aiming to save for a long-term goal, as the temptation to spend the money increases.
• Increased management: Short-term deposits require more active management, as the decision of what to do with your funds upon maturity occurs more frequently compared to long-term investments.
• Potential loss of competitive rates: If you choose to roll over your short-term deposit automatically, you may lose out on competitive interest rates as market conditions change.

There are a couple of reasons why you might decide to sign up for a short-term deposit. Generally, these accounts offer a good way for individuals with short-term savings goals or those who have a lump sum to save at a predictable return. 

Some of the reasons you may want to consider a short term deposit are: 

1. Diversification: Using shorter term deposits alongside savings accounts - or even long term deposits - can be a helpful way of hedging where interest rates are going. For example, you can lock in a good interest rate for a while if you’re unsure whether rates are going up, down. Then, when the economic climate becomes clearer, you can choose whether to save your money for the short or longer term.
2. Budgeting Tool: Short term deposits can serve as a budgeting tool for upcoming expenses. For example, if you know you have a large purchase or payment coming up in a few months, you can place the funds into a short term deposit. That way, you can earn interest while also making sure that the money is set aside for its intended purpose.
3. Low risk: Compared to other investment options, short term deposits are generally considered low risk. Your initial deposit is guaranteed, and you know exactly how much interest you will earn over the term. This predictability can provide peace of mind, especially for risk-averse savers.
4. Loyalty bonuses: Some providers offer loyalty bonuses in the form of a little extra interest for rolling over your term deposit at maturity with them. 
5. Retirement planning: If you’re nearing retirement, short term deposits can be a useful tool. They can provide a stable source of income in the interim while you plan your longer term investments.
6. Ladder strategy: Short term deposits can be used as part of a ‘laddering’ strategy. This involves dividing your savings into multiple short term deposits with different maturity dates. As each deposit matures, you have the option to reinvest or access the funds. This approach can give you a chance to withdraw if you think you’ll need the cash soon.

If you’re wondering where to find a short term deposit, you can check out our term deposit comparison page, where you can take a look at the different offers available in the market.