Term Deposits vs Investing

New Zealanders are seeing a tempting sight: sky-high interest rates on term deposits. With inflation as high as it has been, these guaranteed returns offer a safe haven for your money. But before you lock it all away, consider the long game. Investing, with its inherent risks, might be a wiser strategy for many.

The Allure of Term Deposits

Term deposits are undeniably attractive right now. With inflation trending back down, term deposit rates offering returns are higher than the rate of inflation. This means your money is guaranteed to grow at a predictable pace, outpacing inflation and protecting your purchasing power. Plus, they’re low-risk – the New Zealand government insures deposits up to a certain amount, providing peace of mind.

The Not-So-Sweet Side

There’s a catch, however. Term deposits lock your money away for a fixed period, typically from a few months to several years. This limits your access to your cash and hinges on current interest rates remaining high. The Reserve Bank of New Zealand is expected to lower interest rates in the coming years as we approach closer to the target range of between 1-3%, which means the term deposit rates will come back down eventually too.

Why Investing Wins in the Long Run

Here’s where investing comes in. While the stock market or property can be volatile, history shows that they tend to outperform term deposits over extended periods. Stocks offer the potential for much higher returns, while property can provide capital appreciation alongside rental income.

Let’s take a look at some recent statistics on term deposits in New Zealand, as mentioned in this video here:

• The total amount of money in bank term deposits in New Zealand has grown by a staggering 36% in just the past 3 years, reaching $213 billion by December 2023.

• This significant increase is largely driven by the rise in interest rates on term deposits. In December 2023, you could earn an average of 6% on a one-year fixed term deposit, a sharp increase from the less than 1% return available only two years ago.

• Notably, term deposit rates are currently outperforming both inflation and the returns from the New Zealand share market.

Making the Right Choice

Term deposits offer security and predictability in the short term, but remember, these high rates won’t last forever. When the current offers expire, some deposit holders will likely seek alternatives, potentially increasing demand in other investment markets. For long-term wealth creation, consider investing. While investing holds inherent risks, history shows it can outperform term deposits over extended periods. Don’t be fooled by the temporary allure of high interest rates – take the long view and invest in your future.