When it comes to financial security, you’ll often hear from financial experts that an emergency fund is one of the most important things you can have. It’s your safety net for life’s unexpected expenses – whether it’s car repairs, medical bills, or even a sudden job loss. But where should you keep your emergency fund? One option you might be considering is a term deposit. This article explores how term deposits stack up for emergency funds, weighing up some of the pros and cons to see if term deposits may be worth considering.
Key points covered
- Benefits of a term deposit
- Term deposit considerations
- Choosing an emergency fund type
Benefits of using a term deposit for emergency funds
Higher interest rates
One of the biggest benefits of a term deposit is that it commonly offers higher interest rates compared to a standard savings account. This means your money grows at a stable, fixed rate over time, provided you hold to maturity. If you’re looking for a safe place to park your emergency funds and still earn a little extra, a term deposit may work in your favour.
Fixed returns and predictable growth
With a term deposit, you know exactly how much interest you’ll earn if you hold to maturity, which makes it a predictable way to grow your savings. There’s no guessing about market changes or fluctuating interest rates – it’s all locked in from the start and remains the same until the end of the term. For savers who prefer certainty and stability, this is a key benefit.
Discourages impulsive spending
Since your money is locked away for a set period, term deposits may also help prevent you from dipping into your emergency fund for non-emergencies. It’s difficult to access your term deposit savings before the maturity date without facing early break costs (unless financial hardship applies), which might encourage more disciplined savings.
Low-risk investment
Term deposits are considered a low-risk investment as they are less subject to market changes during your fixed term length. Plus, with the Government’s Financial Claims Scheme, your deposit is protected up to $250,000 per account, per authorised deposit-taking institution (ADI).
Considerations when using term deposits for emergency funds
Limited accessibility
The main drawback to using a term deposit for your emergency fund is that your money is locked away for a fixed term, which can be anywhere from a few months to several years. If you need access to your funds before the term ends, you might face delays, penalties and/or restrictions, which isn’t ideal when you’re dealing with an emergency. However, these may be waived in cases of proven financial hardship.
Early break costs
If you do need to access your money before the term is up, you’ll likely face early break costs. These break costs are typically an adjustment to the interest or funds paid to you. However, as mentioned, these break costs may be waived in cases of proven financial hardship.
Inability to make additional deposits
Once you’ve set up a term deposit, you can’t add more money to it during the term length. This can be slightly inconvenient if you’re still building your emergency fund and want to continue contributing. You’d need to open a new term deposit, wait until your original term deposit rolls over and add the contribution then, or look for another savings option.
Factors to consider for your emergency fund
When deciding whether a term deposit is right for your emergency fund, there are a few key factors to think about
Liquidity needs
How quickly might you need access to your money? If you want instant access in case of an emergency, a term deposit may not offer enough flexibility. On the other hand, if you’re willing to wait to access your money, a term deposit could work for part of your emergency fund.
Interest rates and potential returns
Term deposits often offer better returns than standard savings accounts, but it’s worth shopping around and comparing interest rates. Also, consider how the term length may affect your returns. Mid-length terms (about 6 months to 12 months) commonly have higher interest rates, but they also mean locking your money away for a longer time.
Personal financial situation
Consider your overall financial situation. Do you have other savings or investments that could act as a backup if you need quick access to cash? If so, a term deposit could form part of your emergency fund. But if your emergency fund is your only safety net, liquidity might be more important than earning a higher interest rate.
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