What Is a Term Deposit and How Does It Work?

What Is a Term Deposit and How Does It Work?

As far as investing goes, term deposit rates are some of the most popular. This type of savings account necessitates that your money is held by a financial institution like a credit union for a certain amount of time. A higher interest rate can add up to a better return on your investment. However, before you go opening a new profile with an online bank or a money market account, you need to have a clear concept of how a term deposit works.

Term Deposit Essentials

A term deposit account often uses a minimum deposit amount with a specific goal in mind as far as savings go. A term deposit is often a longer-term investment that can turn into a high-yield savings account if you manage your funds smartly, adhere to any minimum balance requirement your financial institution requests, and choose a term deposit with the highest rate possible. Your annual percentage yield will vary depending on your interest rate but, unlike some checking accounts, you may not have to maintain a higher minimum deposit or pay annual fees.

Term deposits are, however, subject to an early withdrawal penalty. This isn’t the ideal high-yield savings account for those who know they will want their funds quickly which the federal reserve advises against. If you do want to withdraw early, ask the customer service department at your financial institution about the early withdrawal penalty and how it could impact you moving forward.

Show me the money

Term deposits, also called long-term CDs, are as easy to apply for as any normal bank account, debit card, or credit card. You’ll choose between the best CD rates and you’ll often want to select the long-term CDs that have a higher rate of interest so your funds will mature more quickly. Once you’re done comparing rates and yields, you’ll want to determine how much money to put into your savings account. Your CD rate may be impacted by any outstanding debt you carry such as student loans. Per the federal reserve, term deposits can come with a wide range of terms. Once you’ve selected a term deposit with a favorable CD rate, you’ll receive a certificate of deposit.

Choosing a Term Deposit

If you’re looking to start a term deposit, begin by talking to your credit union or online bank. Many financial institutions offer these accounts at a higher rate than some other financial institutions. However, if the CD rate offered by your credit union is low or the minimum balance requirement is too high, don’t be afraid to shop around a bit. This is a long-term savings account investment that can pay out nicely if you select the right account.

It’s always a good idea to compare term deposit rates. Unlike a checking account with a traditional bank, a higher rate is often better. However, read the fine print. Sometimes, the highest rate accounts are the most restrictive on how long you have to keep your money in place. They may also come with a prohibitively high minimum balance requirement.

Show me the money

More often than not, you’ll want to strike a healthy balance. Go for a savings account that has a higher rate but also isn’t restrictive. Read through every policy thoroughly before making a final decision. You may find that a lower-rate account also has better incentives for account holders. Ultimately, you want to make your money work for you passively. You shouldn’t have to monitor a term deposit account all that frequently to know that it’s working.

A term deposit account is an excellent investment if you select the right plan. It’s a simple, effective way to develop your financial portfolio and, when managed right, can pay out handsomely.

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