While term deposit rates are improving as the cash rate rises and offer a safe source of income, they will never be the best asset for growing your wealth.
That's because the returns on offer with term deposits pale in comparison to historical share market returns.
For example, at present, Commonwealth Bank of Australia (ASX: CBA) is offering 3.75% per annum on 12-month term deposits. Whereas the share market has historically provided investors with a 10% per annum return.
And while term deposit rates could still rise a touch more in the coming months if the RBA takes rates higher, I believe they are close to peaking given how inflation is now easing.
Term deposits versus ASX shares
Let's say we invest $100,000 into a term deposit that yields 4% per annum. In 10 years, you would have grown your investment to $148,000 if you reinvested the proceeds each year.
Whereas, if you generated a 10% per annum return from the share market, your $100,000 investment would have become $259,000 in a decade.
That's a $100,000+ difference!
And while there are risks to investing in the share market, unlike term deposits, and past performance is not a guarantee of future returns, I believe the risk/reward on offer is compelling enough to choose ASX shares over term deposits.
Buy shares like Warren Buffett
Consider taking the Warren Buffett approach if you choose to invest in ASX shares instead of term deposits.
Over several decades, the Oracle of Omaha has delivered market-beating returns for his company Berkshire Hathaway thanks to his focus on buying high-quality companies with competitive advantages, strong business models, and fair valuations.
The good news is that there's no shortage of quality in the Australian share market. ASX shares such as Macquarie Group Ltd (ASX: MQG), REA Group Ltd (ASX: REA), and TechnologyOne Ltd (ASX: TNE) tick a lot of these boxes and could be worth further investigation.
Alternatively, the popular VanEck Morningstar Wide Moat ETF (ASX: MOAT) enable investors to buy a collection of Buffett-type stocks through a single investment.
Investing $250 a month in ASX shares or term deposits
You don't just have to start with a large lump sum of money to grow your wealth Buffett-style.
By investing $250 a month, you have the potential to retire rich if you start early enough.
For example, thanks to compounding, if you were to invest $250 a month for 30 years and average a 10% per annum return, you would grow your wealth to approximately $520,000. Whereas doing the same with term deposits would yield approximately $172,000 at a 4% interest rate.
If you have a longer investment horizon of 40 years, your returns would be $1.4 million and $291,000, respectively, all else equal.
All in all, I believe this demonstrates why ASX shares are the superior option for investors looking to retire rich.
