Understand your term investments 18 May 2016

When you invest money on a term deposit, you’ll find a perplexing number of options, which are hard to assess.

A client put $100,000 on a term investment for five years with interest at 6% payable at the end of each quarter. A few months later, another $100,000 was invested, also at 6%, but payable at maturity. The first yielded $27,887.52 interest after tax and the second only $24,750.

Understand what the bank is offering. The interest rate isn’t everything. Frequency of interest payments is just as important.

Also, don’t overlook the credit rating of your bank. There’s a wide divergence from AA- (the bank has a very strong capacity to pay its debt) down to BBB- (the bank has adequate capacity to pay its debts, but adverse economic conditions…).

If you put all your savings with one bank and a disaster befalls that bank, you might regret not spreading your investments. Of course, you might also regret spreading your investments and including that one bank which gets into trouble!

You might find  useful to compare interest rates and to use their calculator.

If you’re on the top tax rate, it might pay to find a PIE investment and be taxed at 28% instead of 33%. Some banks offer PIEs for five years; most don’t.


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