Steve chooses a term deposit
As a make-believe example, let’s pretend 32-year-old tradie Steve wants to invest $10,000 in a 5 year term deposit. Let's say when he compares the accounts available from the two banks of which he is already a customer, Steve discovers a slight difference in the interest rates on offer – Bank A offers 2.75% p.a. while Bank B offers 3.25% p.a. Both accounts pay interest monthly, so Steve compares the accounts to see just how much difference a higher rate will make to his end balance.
|Bank A||Bank B|
|Interest rate||2.75% p.a.||3.25% p.a.|
|Investment term||5 years||5 years|
|Balance after 5 years||$11,472.21||$11,761.90|
|Total interest paid||$1,472.21||$1,761.90|
As you can see, even though the interest rate from Bank B is only 0.50% p.a. higher, this works out to be a difference of $289.69 at the end of the investment term.