Term deposits have been around for a very long time. They're a great way to earn a return while protecting capital from danger and volatility.
Savers can lock away their money for a period of months or years and earn interest. Typically, the longer savers are willing to give a financial institution their cash, the higher the interest rate they can receive. At the end of the term, savers are allocated their interest and can choose to receive their original sum back or carry out another term.
There are numerous ASX shares that offer term deposits including Judo Capital Holdings Ltd (ASX: JDO), Macquarie Group Ltd (ASX: MQG), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), ANZ Group Holdings Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Bank of Queensland Ltd (ASX: BOQ), Bendigo and Adelaide Bank Ltd (ASX: BEN), AMP Limited (ASX: AMP) and MyState Ltd (ASX: MYS).
But even though term deposits earn interest, are they actually a good option for growing wealth?
Writing on AMP's website, Dr Shane Oliver explains why using term deposits can be a negative for some Australians.
Too conservative in early life
Oliver explained that one of the mistakes people can make that keeps them from their financial goals was being too conservative in their younger years.
The AMP expert noted that "cash and bank deposits are low risk and fine for near-term spending requirements and emergency funds, but they won't build wealth over time."
He pointed out that if $1 had been invested across various Australian assets since 1900, it would have performed quite differently.
According to Oliver, cash has returned an average of 4.6% per annum since 1900, and $1 invested at the start of the last century would be worth $263 today (including re-invested interest).
However, if $1 had been invested in Australian shares, it would have returned an average of 11.7% per annum and would now be worth $955,656 (if dividends had been reinvested).
The ASX shares' return has been achieved despite various headwinds, including World War I, the Great Depression, World War II, stagflation in the 1970s, the Global Financial Crisis (GFC), COVID-19 and the latest inflationary period.
Compound interest can help grow a dollar into a much larger amount over the long term.
Oliver also wrote:
Not having enough in growth assets early in their career can be a problem for investors as it can make it harder to adequately fund retirement later in life as they miss out on the magic of compounding higher returns on higher returns through time in growth assets like shares and property.
Fortunately, compulsory superannuation in Australia helps manage this — although early super withdrawal for various purposes (through the pandemic, for medical needs and as proposed for housing) may set this back for some.
Foolish takeaway
While term deposits definitely have their place, particularly with older Australians wanting a low-risk investment, it makes more sense for younger Australians to invest in growth assets such as ASX shares.
