Why Term Deposits Aren’t Keeping Up With Inflation (And What You Can Do Instead)
For decades, term deposits have been the go-to “safe” option for savers.
They feel secure. Predictable. Low stress.
But here’s the uncomfortable truth: many term deposits are quietly costing savers money in real terms.
Not because the balance goes down — but because inflation erodes its purchasing power faster than interest can rebuild it.
If you’re relying heavily on term deposits, this is something you need to understand.
What Does “Keeping Up With Inflation” Actually Mean?
Inflation measures how much prices rise over time.
If inflation is 4% and your money earns 3%, you’re effectively 1% worse off — even though your balance increased.
This is called negative real return.
Your money grows on paper — but buys less in the real world.
Why Term Deposits Struggle to Beat Inflation
There are three main reasons:
1. Interest Rates Lag Inflation
Banks don’t increase term deposit rates as quickly as inflation rises. By the time rates look “attractive”, prices have often already moved higher.
2. Tax Eats a Big Chunk
Term deposit interest is taxed as income, unlike some other investment returns. Once tax is applied, the real return is often significantly lower than advertised.
3. Inflation Is Sticky
Even when headline inflation falls, everyday costs — groceries, insurance, power, rates — often stay elevated. Your savings feel the squeeze long after inflation peaks.
When Term Deposits Do Make Sense
Term deposits aren’t bad — they’re just often misused.
They can be appropriate for:
Emergency funds
Short-term goals (0–2 years)
Money you cannot afford to fluctuate
Transitional cash while planning next steps
The problem arises when long-term money is parked in short-term solutions.
The Long-Term Cost of Playing It “Safe”
Over time, inflation is one of the biggest risks to wealth — especially for:
Retirees
Conservative investors
Large cash holders
People who’ve “de-risked” too early
What feels safe emotionally can be financially risky in the long run.
Missing out on growth doesn’t show up immediately — but over 10–20 years, the gap can be substantial.
What Are the Alternatives to Term Deposits?
You don’t need to abandon cash completely.
But many investors benefit from blending certainty with growth.
Depending on your timeframe and risk tolerance, options may include:
Diversified investment funds
Growth-oriented KiwiSaver strategies
Income-producing portfolios
Inflation-aware asset allocation
Laddered approaches combining cash and growth assets
The goal isn’t to chase returns — it’s to protect purchasing power.
A Better Question to Ask Than “What’s the Highest Rate?”
Instead of asking:
“What term deposit rate can I get?”
Ask:“What is this money meant to do for me — and when?”
That single shift changes everything.
Final Thoughts
Term deposits still have a place.
But in a world of persistent inflation, relying on them alone can quietly move you backwards.
A good financial strategy balances:
Security and
Growth and
Tax efficiency and
Time
If you’re unsure whether your savings are truly working for you, it may be time to zoom out and reassess the bigger picture.
Legaseed NZ Ltd (FSP1005404) holds a licence issued by the Financial Markets Authority and provides financial advice in relation to financial & retirement planning, investments, KiwiSaver and personal risk insurance. Our disclosure information can be found on our website www.legaseed.co.nz, or is available on request and free of charge.
