Unveil the power of compound interest in maximizing your investments! Delve into the critical choice between a 3-year and a 5-year term for a $55,000 deposit in a term PIE. Explore how time, rates, and financial goals impact your returns.
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“How long would I need to wait for to start seeing the snowball effect kick in to make bigger returns? I have $55k that I’m going to deposit in a term PIE, and I think I should be ok with it sitting away for at least 2 years. Would I better off going for 3 years or maxing it out to 5 to see the magic?”
(Original question on Reddit)
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I can certainly help with your question! Compound interest takes effect when the interest that accrues on an investment or deposit starts earning interest itself. In other words, you earn interest not just on your initial investment, but also on the interest that has already been added to the principal.
The longer your money is invested, the more time it has to compound, and this is where the “snowball effect” comes into play. The longer the compounding period, the greater the impact on your returns.
In your case, it’s a matter of deciding between a 3-year term and a 5-year term for your $55,000 deposit in a term PIE. The decision depends on your financial goals, risk tolerance, and liquidity needs.
Here are a few considerations:
Time and Compounding:
If you choose the 5-year term, you give your money more time to compound, potentially leading to higher returns due to the more extended compounding period.
Liquidity Needs:
Consider your need for liquidity. If you might need access to your funds before five years, the 3-year term might be more suitable. Withdrawing funds from a term deposit before maturity may result in penalties or reduced interest.
Interest Rates:
Check the interest rates offered for both the 3-year and 5-year terms. While longer terms generally offer higher rates, this might not always be the case. Compare the rates for both options.
Financial Goals and Risk Tolerance:
Consider your financial goals and risk tolerance. If you have a longer-term financial goal and can tolerate tying up your funds for five years, it might be worth considering the 5-year term.
Inflation:
Keep in mind the impact of inflation. While your money is compounding, inflation erodes the purchasing power of your money. Ensure that the interest rate on the term PIE is at least keeping pace with inflation.
Before making a decision, it’s a good idea to speak with a financial advisor who can provide personalized advice based on your specific financial situation and goals. They can help you weigh the pros and cons and make an informed decision based on your unique circumstances.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances or contact National Capital.
