MONEY MATTERS

Bank term deposits might not earn much, but sometimes they’re the best option.

They’re boring and they pay low interest. But bank term deposits are probably the best place to park money for a few months – or even a year or so. Anywhere else could be too risky.

A reader we’ll call Jackie writes: “I am currently selling my house and anticipate I will have around $500,000 after I pay off my existing mortgage. I aim to buy again, but possibly not in the next 12 months. Any suggestions for short-term investment?

“I want to safeguard my nest egg until I need it for another property.”

ONE POSSIBILITY FOR JACKIE’S MONEY IS A NON-BANK TERM DEPOSIT OFFERED BY A FINANCE COMPANY.

They pay higher interest than banks, which is, of course, appealing. But whenever someone offers you a higher return, think about why they are doing that. They’re borrowing your money, and will surely want to pay as little interest as possible. The only reason they offer more than the banks is because they are riskier, so savvy people will lend to them only if they get a higher return.

I’m not saying every nance company is high-risk. They are more regulated than when several companies collapsed during and after the 2007-08 global nancial crisis. Still, I don’t invest in them.

WHAT ABOUT CONSIDERING MANAGED FUNDS?

These include

KiwiSaver funds, but obviously they are not suitable for short-term investing unless you’re over 65. But most KiwiSaver providers also offer similar funds that you can withdraw from whenever you like.

We should straight away rule out all but the lowest-risk defensive funds. Higher-risk funds – such as balanced and growth funds – bring in higher long-term returns, but they’re volatile. Jackie doesn’t want her half million dollars to diminish just when she’s about to buy a home.

Defensive funds are certainly an option. Their value rarely dips, and they might bring in a slightly higher return than term deposits. But by the time you pay fees, that might not be the case. And they’re a bit more complicated.

BANK TERM DEPOSITS LOOK LIKE THE WINNER.

But don’t just accept what your bank offers. Check other rates in the Savings section of interest.co.nz. If you would rather stick with your bank, tell them if you can do better elsewhere and they might match the higher rate.

ONE FINAL POINT.

If Jackie has taxable income of more than $48,000, she should consider banks’ “term PIEs” on interest.co.nz. Their top tax rate is 28 per cent, compared with 30 per cent or 33 per cent on other income.

CORRECTION:

In the footnote of my Christmas column I stated that if you have mortgages on your home and a rental property, the interest is deductible on the rental but not on your home, which is correct. However, you cannot reorganise your mortgages to take advantage of that.

“I want to safeguard my nest egg until I need it.”