Disappointing interest rates on everyday savings accounts and other investments mean investors and everyday savers are looking for alternative places to put their money.
One of these is long-term savings accounts. Long-term savings accounts have several advantages.
The primary advantage is they usually offer a higher rate of interest albeit that the money invested is left untouched for a relatively long period. This is typically around five years.
They are especially useful for goal setting, such as saving up for a house deposit or retirement.
Compound interest pays in the long-term
The most interesting feature of long-term savings accounts is the power of compound interest.
The interest earned from these savings accounts is, in turn, reinvested and added to the base for calculating interest for the later years.
So, in theory, the base amount for calculating the interest keeps growing with time, and the money multiplies faster, generating higher returns over time.
These kinds of accounts usually attract an overall higher interest rate than short-term investments. The longer time horizon also protects the money invested from short-term price volatility.
Early withdrawals can mean penalties
Some long-term savings accounts offer some tax relief, such as tax-free withdrawals and tax-deferred growth.
Savings in a long-term account can also provide financial peace of mind knowing that there is a secure amount of money ring-fenced away from everyday expenses and short-term costs.
Of course, as with every investment, there are always some possible downsides too.
Limited liquidity: Since these accounts are designed for long-term savings, accessing the funds can be more difficult than with a regular savings account.
Early withdrawals might result in penalties, loss of interest, or other fees. This limited liquidity can make it challenging to access funds in case of an emergency or unexpected expense.
Inflation risk: The interest rates offered by long-term savings accounts may not always keep up with inflation.
Over time, the purchasing power of your savings could decrease if the interest rate fails to match or exceed the inflation rate.
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