Time Deposits: The X and Why’s
When people talk of time deposits or fixed deposits, a blank stare is the usual response. Most people have little to no idea about this service, which is a sad reality because there’s a lot to be gained from having a time deposit. Below we discuss the pros and cons of keeping—or more appropriately, investing—your money in a time deposit account.
What is a time deposit?
A time deposit is similar to a savings account but more appropriately described as a type of investment account where you keep your savings for a set amount of time. One of the main advantages of a time deposit are higher interest rates and its “risk-free” nature. The terms of most time deposit accounts range from 30 days to up to five years. With a time deposit account, you can expect higher earnings via interest the longer you keep your money in the bank.
Non-liquidity of funds
Money in a savings account is considered liquid because you can withdraw it anytime without incurring penalty charges. This isn’t the case with a time deposit account wherein any withdrawal made corresponds to a penalty fee or forfeiting of the interest amount.
Low investment return
Putting your money in a time deposit account guarantees earned interest or the specified investment return when the account reaches maturity. However, the specified interest rate could dramatically decrease its value once inflation rates get in the picture. As the inflation rate rises, your investment return—because it’s fixed—loses its original perceived value.
No additional deposits
A time deposit is a lump sum deposit with no option to add to your savings in the future. This might not be an ideal option for those who regularly add to their savings account, but one way to resolve this issue is to open multiple time deposits with staggered maturity dates.
No startup fees and service charges
You don’t need to worry about paying penalty fees or charges with a time deposit account, so long as you don’t withdraw before the account’s maturity date.
Low risk and maintenance
For the cautious, a time deposit account is a viable option because there’s little to no chance of losing your money. Also, there’s not much else you can do once you deposit your money so maintenance isn’t an issue.
Protection from impulse spending
Once your money is in a time deposit account, you can’t withdraw on a whim without paying hefty penalty charges. This will help curb your impulse spending habits while also helping your money grow.
Protection from market slumps
The fixed interest on your time deposit account means that it won’t be affected by market interest rates. Even if market rates fall, you will still earn the original interest rate. Take note, though, that a rise in market rates won’t affect your time deposit’s interest rate, too.
A time deposit is a great alternative to a savings account if you want something that’s low-risk and requires little to no maintenance. To learn more about the banks that offer time deposit account services, compare with GoBear today!