Did you know you could use term deposits to help plan your holiday spending? Whether you’re gearing up for Christmas, Lunar New Year, or any other festive occasion, a term deposit may help you manage your holiday budget ahead of time. This financial tool can give you peace of mind knowing your money will be available when you plan for it, and with some extra funds on top.
What is a term deposit?
A term deposit is a type of savings product where you deposit a set amount of money into an account with an authorised deposit-taking (ADI) for a specific period of time. In return, you lock in a fixed interest rate that won’t change for the term, no matter what happens with market rates, provided you hold to maturity. Once the term is up, you get your original money back, plus the interest you’ve earned. Or, you can roll your original deposit and/or your principal or interest into a new term deposit to keep earning interest (at the then prevailing interest rate).
How does this help you with holiday spending?
By timing your term deposit to mature just before the holiday season, you’ll have access to that money exactly when you need it and with extra funds thanks to the interest you’ve earned.
How to align your term deposit with your holiday spending
1. Determine when you’ll need the money
The first thing to do is determine when you’ll need the funds. For example, if your Christmas shopping starts in November, or if Lunar New Year falls on a date in January or February, you would set your target maturity date accordingly. Set your term length to end when you’re most likely to start spending (keeping in mind that different ADIs offer different term length options).
2. Decide on your savings amount
How much will you need for the holiday you have in mind? Once you’ve worked out your budget, you should have a better idea of how much you want to deposit. Keep in mind that minimum deposit amounts vary between ADIs. Commonly, you’ll find minimums between $1,000 and $5,000. Just remember your deposit will be locked away, so make sure you don't need to dip into it early or you may face early break costs (a reduction in your interest or returns) unless proven financial hardship applies.
3. Choose the term length
Let’s say Christmas has just passed, and you want to plan for next year. You might consider depositing money into a 6-month term deposit that will mature in time for next Christmas. As interest rates offered typically vary depending on the term length, it’s worth comparing options to find the best term deposit rate for your needs.
4. Enjoy your holiday savings
When the term length is up and the deposit matures, you should get your original amount back, plus interest. This extra boost can give you more spending power just in time for the holidays. And because you were disciplined with your money, it may ease the potential financial stress that can come with overspending during the holiday season.
Some benefits of using term deposits for holiday season spending
1. Fixed interest rate. This may give you peace of mind, knowing exactly how much interest you’ll earn if you hold until maturity, no matter what happens in the market.
2. Potentially higher rates. Term deposits may offer more attractive interest rates than other savings products.
3. Government protection. In Australia, term deposits with ADIs are protected by the Australian Government Financial Claims Scheme. This is designed to cover deposits up to $250,000 per account holder, per ADI.
4. No ongoing fees. Term deposits typically don’t come with any account-keeping or service fees. However, be mindful that you may incur early withdrawal costs if you break your term deposit before it matures.
5. Encourages discipline. Since the aim is not to withdraw the money until the term ends, you may be less likely to spend it impulsively. This may be helpful for anyone trying to control impulse spending while saving for the holiday season.
- Read more about the benefits of a term deposit
Some term deposit considerations
When deciding if a term deposit is the right financial product for you, it’s important to consider your unique financial situation and goals.
You may also want to consider the following
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If you need to access your money early, you may face early break costs, and most ADIs require 31 days' notice for withdrawals (unless proven financial hardship applies). Even with notice, withdrawing early could reduce the interest or returns paid to you (also known as a prepayment adjustment).
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Once your term deposit is set, you can’t add additional funds during the term. To deposit more, you’d need to either open a new term deposit or wait until the current one matures.
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While a fixed interest rate provides stability, you won't benefit if rates rise during your term. However, your rate is protected if interest rates fall – you'll continue earning your locked-in rate until maturity.
Important Information
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