You need to know the risks or you might see lower returns on your term deposits.
One of the risks of saving with term deposits involves interest rates. If all your term deposits mature at the same time—and rates are low at that time—this may reduce your overall income or growth of your savings.
One way to avoid this risk is to ladder your term deposit maturities.
Why you should ladder your term deposits
You can reduce interest rate risk by allocating a portion of your savings to terms with different maturities so a portion matures each year rather than all at once.
For example, if you have $100,000 to invest in term deposits, split your terms into five $20,000 terms with each coming up for renewal each year for the next five years. This way, only 20% of your term deposits will mature each year. As the terms come up for maturity you can cash the term in or reinvest it for five years at the then-prevailing rate. Reinvesting at the five-year rate will maximize your rate of return but you will still have a portion maturing each year. The laddering strategy locks in the portfolio for higher long-term rates, yet also provides liquidity.
Want to talk to a G&F expert about your term deposits or have other questions about your finances?
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