Personal Finance: Questions and Answers: What you need to consider before committing to a fixed-interest investment

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Question: I am thinking of investing some money in a five-year fixed deposit. Is there anything I should watch out for before making this commitment?

Answer: Without knowing more about your personal circumstances, such as what other assets you have, what your cash flow needs are and how much risk you can comfortably take with your investments, I cannot give any specific advice. What I can do is flag some of the issues you should consider when making any type of investment that will commit you to a five-year fixed-interest investment.Inflation plays a key part in any investment you make.

Since 2020, interest rates have been as low as I have ever known them. Inflation was 3.3% in 2020 and 4.5% in 2021. In December 2021, the inflation rate came in at 5.9%. It would seem that inflation is moving upwards, although there are actions being taken to reverse this trend. We had a 0.25% increase in rates at the end of last year and a number of economists have indicated that we should have more increases.

There are two types of interest: simple interest and compound interest. Simple interest is just the interest on your capital, whereas compound interest also gives you interest on the interest you earn. This can make quite a difference to an investment.

 

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