Making surplus cash work hard for your business and generating additional income can be an intelligent investment strategy – but only at the right time.
Why use a term deposit as an investment strategy in 2023?
- Higher Interest rates: Term Deposits generally offer higher interest rates than traditional savings accounts. However, it would help if you considered the timing of your investment and whether it’s worth having that cash out of action in your business.
- Low-risk investment: The Australian government’s Financial Claims Scheme (FCS) protects deposits made with Australian banks, building societies and credit unions. In other words, the government will guarantee (up to $250,000 depending on the amount and terms) in the unlikely event your bank, building society or credit union collapses. This provides a level of security, knowing you won’t lose all your cash in a crash.
- Guaranteed Returns: You know exactly how much interest you’ll earn on the investment, which is helpful for budgeting and expense planning.
- Cashflow management: Your money is earning interest and not sitting idle in a low-interest bank account. It can, for all intents and purposes, be money for nothing.
Markets can change quickly and unexpectedly, however. Who saw the global pandemic coming? Term Deposits are available in a range of terms, from a few months to several years, so consider the term that best suits your needs and financial goals and the timing of your investment. Penalties may apply for early withdrawal. Regarding timing for Term Deposits, right now (2023), they make good sense, but in 2020, for example, not so much.
Back in 2020, a Term Deposit paid only 0.25%, whilst bank accounts paid virtually nothing, so tying up extra cash meant you made almost nothing and was hardly worth the effort. Locking $1m away for 12 months would only yield $2,500, and you’d be without the cash to call on if needed. In contrast, Term Deposits are at about 4.5% today, so the same amount will result in $45k, making it considerably more attractive.
Whilst a Term Deposit can be a smart investment decision, ensure you’ve covered all the bases and still have some cash available for unforeseen circumstances.
The best way to identify how much to invest is with a cash flow forecast. If you don’t currently use a cash flow forecast, let us know, and we can help set you up with one. They are a handy business tool, so it’s worth putting the time in. Of course, if you are considering taking advantage of higher Term Deposit interest rates right now, talk to your Accountant or Financial Planner to fully understand the implications, as Viridity does not provide financial advice.