Australian (ASX) Stock Market Forum

# Term deposits

#### NewOrder

For the sake of the example, say you put \$50000 into a term deposit for 12 months, are you better to do 12 x consecutive 1 month accounts at 2.5% or 1 x 12 month term paid monthly at 5.84%

Or, what is the best way to set up a term deposit?

#### pixel

##### DIY Trader
For the sake of the example, say you put \$50000 into a term deposit for 12 months, are you better to do 12 x consecutive 1 month accounts at 2.5% or 1 x 12 month term paid monthly at 5.84%

Or, what is the best way to set up a term deposit?
The interest is usually quoted as per cent per year. Therefore 6% p.a. beats 2.5% p.a. any time. If the numbers are closer together, there could be a very tiny difference between, say, 4 quarterlies vs one annual; but the banks aren't stupid - trust them to quote you the annual figure that sounds best, but if you go for a shorter period, they won't divide the annual rate by 4 (or 12), but do it the mathematically correct way, using the 4th (or 12th) root of the compounding factor.

Whenever I decide it's time to put a set amount away for a few months, I usually visit
http://www.ratecity.com.au/term-deposits
and pick the highest offer currently available.

#### cynic

The interest is usually quoted as per cent per year. Therefore 6% p.a. beats 2.5% p.a. any time. If the numbers are closer together, there could be a very tiny difference between, say, 4 quarterlies vs one annual; but the banks aren't stupid - trust them to quote you the annual figure that sounds best, but if you go for a shorter period, they won't divide the annual rate by 4 (or 12), but do it the mathematically correct way, using the 4th (or 12th) root of the compounding factor.

Whenever I decide it's time to put a set amount away for a few months, I usually visit
http://www.ratecity.com.au/term-deposits
and pick the highest offer currently available.
I thought there was a distinction in the industry between "per annum" and the effective annual rate. Hence I've always done my own calculations when translating from the p.a. to the effective annual rate prior to deciding which was best. Was I mistaken in this viewpoint?

#### skc

##### Goldmember
For the sake of the example, say you put \$50000 into a term deposit for 12 months, are you better to do 12 x consecutive 1 month accounts at 2.5% or 1 x 12 month term paid monthly at 5.84%

Or, what is the best way to set up a term deposit?
Is that 2.5%p.a.? There is no way someone is offering 2.5% per month! Unless you are talking about the Zimbabwe dollar or something!

To work out how much interest you get per month from 2.5% per annum, simply divide 2.5%/12 = 0.20833% (or 0.0020833) per month. If you do that over 12 consecutive months, simply calculate (1+0.20833%) to the power 12 which gives 1.025288, which means effective annual rate of 2.5288%. Slightly but not much better than 2.5% but it does illustrate the principles of compound interest.

#### NewOrder

Is that 2.5%p.a.? There is no way someone is offering 2.5% per month! Unless you are talking about the Zimbabwe dollar or something!

To work out how much interest you get per month from 2.5% per annum, simply divide 2.5%/12 = 0.20833% (or 0.0020833) per month. If you do that over 12 consecutive months, simply calculate (1+0.20833%) to the power 12 which gives 1.025288, which means effective annual rate of 2.5288%. Slightly but not much better than 2.5% but it does illustrate the principles of compound interest.
yes it is 2.5%pa, sorry I should have made that clearer. The figures are from the ANZ

#### skc

##### Goldmember
yes it is 2.5%pa, sorry I should have made that clearer. The figures are from the ANZ
I hope you understand that the 5.84% 12month deposit is far superior to your 12x 1month at 2.5% p.a.

If you have any doubt please read up on basic interest rate calculations. Wikipedia would probably do.

#### Julia

##### In Memoriam
For the sake of the example, say you put \$50000 into a term deposit for 12 months, are you better to do 12 x consecutive 1 month accounts at 2.5% or 1 x 12 month term paid monthly at 5.84%

Or, what is the best way to set up a term deposit?
I'm puzzled that you're even thinking about going for 2.5% p.a. as against 5.84%?
Further point to consider is that if you only commit for a one month period, assuming you can renew at same or better rate, how are you going to feel if rates drop?

I never place more than 25% of the intended total deposit into a single term deposit. That way, if the really unexpected occurs, and you need the money, you are at least not losing the interest on the whole amount.

#### Huskar

You don't even need to lock your money away in a term deposit and you can still get a better return than 5.84% (or 2.5%), eg a 6% pa savings account with UBank, 6.51% if you deposit a certain amount per month (no affiliation).

#### Tysonboss1

You don't even need to lock your money away in a term deposit and you can still get a better return than 5.84% (or 2.5%), eg a 6% pa savings account with UBank, 6.51% if you deposit a certain amount per month (no affiliation).
I tend to agree,

But would like to here from any advocates of term deposits as to the pros that I may be missing.

I far as I can see locking your money away, at a lower interest rate means your losing out on interest and missing the opportunity to deploy quickly if needed.

#### ajjack

For larger amounts, you cannot beat a Cash Manag Account,
especially for those who trade the markets regularly.

Interest rate around 5% paid monthly and funds at call, there
is no need to lock yourself in for any fixed term.

#### pixel

##### DIY Trader
For larger amounts, you cannot beat a Cash Manag Account,
especially for those who trade the markets regularly.

Interest rate around 5% paid monthly and funds at call, there
is no need to lock yourself in for any fixed term.
That's OK for those of us who trade regularly; RBA's cash rate (currently 4.75%) calculated daily, and no account or transaction fees, that's about industry standard these days.

But even so, some traders - yours truly included - may want to have a certain part of their total assets secured at a guaranteed fixed interest. Especially if it's tax-free under Superannuation rules, an ANZ 9-month td suits me fine at 6.5% p.a.

Which, in answer to tysonboss1, can make a term deposit look pretty attractive.

#### NewOrder

I'm puzzled that you're even thinking about going for 2.5% p.a. as against 5.84%?
Further point to consider is that if you only commit for a one month period, assuming you can renew at same or better rate, how are you going to feel if rates drop?

I never place more than 25% of the intended total deposit into a single term deposit. That way, if the really unexpected occurs, and you need the money, you are at least not losing the interest on the whole amount.
I am often puzzled too by my questions OK I have never really held any cash so have no experience with term deposits. When I looked at the term deposit rates they are all over the place with the 4 mth rate being much higher than the 6 or 9 mth rate.

Anyway a cash management account sounds like a good way to go.

#### Julia

##### In Memoriam
I tend to agree,

But would like to here from any advocates of term deposits as to the pros that I may be missing.

I far as I can see locking your money away, at a lower interest rate means your losing out on interest and missing the opportunity to deploy quickly if needed.
As a general principle, I agree with you. There are, however, exceptions.
Pixel has given you an example.
I will always keep a proportion of my SMSF in cash, regardless of what the market is doing. Hence when there was briefly available about 18 months ago a five year term deposit at 8% p.a. I was very happy to commit this proportion. I think it will be a pretty long time before we see 8% again.

I am often puzzled too by my questions OK I have never really held any cash so have no experience with term deposits. When I looked at the term deposit rates they are all over the place with the 4 mth rate being much higher than the 6 or 9 mth rate.
Banks offer TD rates according to their own needs. So if they foresee a demand over a given period and they need to shore up their deposits, they will put out an offer for an attractive rate. Don't assume necessarily that the longer the term, the higher the rate.

Anyway a cash management account sounds like a good way to go.
I have no idea why anyone would choose the usually much lower rates on a cash management a/c when better rates are available in several online at call accounts, deposits in which are immediately available.

New order, have a look at this website which lists all the available rates on the various types of accounts:

http://www.infochoice.com.au/

#### medicowallet

I have no idea why anyone would choose the usually much lower rates on a cash management a/c when better rates are available in several online at call accounts, deposits in which are immediately available.

New order, have a look at this website which lists all the available rates on the various types of accounts:

http://www.infochoice.com.au/
100% agree. It is amazing how many people I know with very sizeable cash holdings, have them at 5% or so.

Bit sad really. The best ones are online, can be setup online, and mostly do not offer "advisors" any commission.

#### Tysonboss1

I will always keep a proportion of my SMSF in cash, regardless of what the market is doing. Hence when there was briefly available about 18 months ago a five year term deposit at 8% p.a. I was very happy to commit this proportion. I think it will be a pretty long time before we see 8% again.
whats your take on issues such as CBA perils, do you see a place for these in you portfolio.

#### pixel

##### DIY Trader
I have no idea why anyone would choose the usually much lower rates on a cash management a/c when better rates are available in several online at call accounts, deposits in which are immediately available.http://www.infochoice.com.au/
Hi Julia,
IMHO it's horses for courses:
If I want to trade through an online broker, I'll have to use one of the accounts my broker of choice favours. Sure - just by way of an example: Westpac would agree to do all electronic transactions at T+3 through a Macquarie CMA - which in the past offered the most attractive rate. Problem was, Westpac offered me a \$5 lower brokerage if I used a Westpac account. (They have since offered a product that matches the Macquarie conditions as well. No-brainer.)
Now, you do the sums: 700 trades per annum, times \$5: By how much will the special rate of another bank have to exceed the RBA's cash rate (4.75%) in order to make me choose them over Westpac?
I reckon you get the idea

#### skc

##### Goldmember
100% agree. It is amazing how many people I know with very sizeable cash holdings, have them at 5% or so.

Bit sad really. The best ones are online, can be setup online, and mostly do not offer "advisors" any commission.
Most online high interest saving accounts have limit of \$1m. So that "very sizeable" cash holding can't really live there without special arrangement.

#### Julia

##### In Memoriam
Hi Julia,
IMHO it's horses for courses:
If I want to trade through an online broker, I'll have to use one of the accounts my broker of choice favours. Sure - just by way of an example: Westpac would agree to do all electronic transactions at T+3 through a Macquarie CMA - which in the past offered the most attractive rate. Problem was, Westpac offered me a \$5 lower brokerage if I used a Westpac account. (They have since offered a product that matches the Macquarie conditions as well. No-brainer.)
Now, you do the sums: 700 trades per annum, times \$5: By how much will the special rate of another bank have to exceed the RBA's cash rate (4.75%) in order to make me choose them over Westpac?
I reckon you get the idea
Sure, but New Order didn't give any indication that she was taking anything like number of trades or any other qualifying factors into consideration and was sounding as though she was going to choose a cma over some of the more rewarding accounts available. Hence my giving her the infochoice link.

Most online high interest saving accounts have limit of \$1m. So that "very sizeable" cash holding can't really live there without special arrangement.
That's so true and very irritating. Funny you should raise this as I've been giving some thought to pulling some funds out of my SMSF and investing in my own name to a level which takes advantage of the low income tax offset. This would also get round the decision by quite a few of the banks that they won't make their top online rates available to super funds. Presently I don't have anything to speak of invested outside of my SF. Does anyone have any thoughts about this, e.g. something I'm failing to consider?

#### NewOrder

Banks offer TD rates according to their own needs. So if they foresee a demand over a given period and they need to shore up their deposits, they will put out an offer for an attractive rate. Don't assume necessarily that the longer the term, the higher the rate.

I have no idea why anyone would choose the usually much lower rates on a cash management a/c when better rates are available in several online at call accounts, deposits in which are immediately available.

New order, have a look at this website which lists all the available rates on the various types of accounts:

http://www.infochoice.com.au/
Thanks Julia and others for the info. I have looked at the linked site and will do more research as to the options but it is apparent that I need to put some thought into my objectives first.
Might sound odd but I have never really held any cash as it has always gone to paying for life and property, so yes I am nieve but that's why I am here asking questions