Commercial banks offer different kinds of financial products to their clients. Some are specialized for protecting the wealth of the customer, while others create investment opportunities. In this article, we will dive into a thorough discussion of an exceptional type of bank account, ‘fixed deposit account,’ its features, benefits, and tips & tricks.
What is a Fixed Deposit?
A fixed deposit is a bank account that provides the account holder a high-interest rate on the deposited money for a specific period. It’s also known as a certificate of deposit or CD and time account. A fixed account is a safe way of investment that helps the depositor boost the amount of money while keeping it safe in the bank. In return, the depositor promises to keep the money in the bank for a specific period of a predetermined time and compensate the bank if they withdraw earlier. Let’s know more about this low-risk yet high-interest-bearing account.
Features of a Fixed Deposit – Features that are Offered by Banks to the Clients
- High-Interest Bearer A fixed deposit account is an interest bearer account. It offers a much higher rate of interest than any other type of bank accounts. This interest rate mainly depends on the amount of deposited money and the period determined as maturity.
- Predetermined Time: the depositor promises to keep the money in the bank for a specific time. This time is called maturity, which is determined by the bank and the depositor while opening the account.
- Compound Interest: The banks provide interest on the deposited money periodically. Banks offer compound interest to fixed account depositors. This means the interest you earn from your money is added to the principal periodically. [1]
- Flexible Terms: the term of a fixed account is highly flexible. It can be as low as a few months to a more extended period, like 10-20 years. [2]
- Penalty For Withdrawal Before Maturity: If the depositor withdraws the money before promised maturity, they will have to face a fine and compensate the bank with cash in return. [3]
- Renewable: After maturity, the depositor can easily renew the fixed account for another period of time.
- Unaffected By the External Factors: the rate of your interest is unaffected by inflation and the market situation. Besides, the compound interest tackles the time value of your money so that it does not get affected by external factors.
- Other Features: non-transactional, can be withdrawn before maturity, the certificate can be used for a loan, insured by the federal government, ladder options, etc.
Benefits of Having a Fixed Deposit Account
- Low-risk Investment Opportunity: Among numerous other investment options, a fixed deposit comes with this unique option of ensuring low-risk in it. A fixed deposit is a pretty good choice to invest your surplus amount of money since the interest rate is surprisingly high for investment with such low risk. Banks usually Invest your deposited money in sectors like real estate, government securities, loans, etc., that possess extremely low risk. So, for those who do not want to gamble with their money and want to stay anxiety-free about the investment, it’s just a perfect choice for them.
- Security of Your Money: You can’t have another option that keeps your money safe and offers interest at the same time, as a fixed deposit account. If you are worried about the safety issues with your cash, go for this fantastic financial product. It is highly unlikely that your bank may go bankrupt. Even if it does, you don’t have to worry as the federal government insures the deposited money to its listed commercial banks.
- Low or No Fees: Typically, Banks do not charge any fees or charges for the services it provides to a fixed depositor. There’s a logical explanation behind this. Firstly, the account holder does not transact money in a fixed account like other types of accounts. So, there’s no scope for the bank to cut any charge from them. Secondly, they do not charge for account maintenance, as the more they can keep your money, the more profitable they get.
- Loan Opportunity: Banks grant loans to the depositor against the money they’ve kept in the fixed account. this method is also called a CD secured loan. [4] It is a massive opportunity for the fixed depositor when they face any financial crisis. When you have a CD account, you don’t have to look for other options or finance your business from any costlier source. Although you have to pay interest for the loan, you can take this loan very quickly from the respective bank without any hassle. But the amount of the loan must be less than the deposited amount. Keep in mind that the money in your CD continues to earn interest even when you’re repaying the taken loan.
- Consistent Income Source: A fixed account can be a very constant source of income for you. The interest rate is predetermined. So, you can easily predict the amount of income in each period and optimize your budget according to that. Unlike a job or stock, a fixed deposit will consistently pay you the interest. For those who need a reliable source of income without taking any risk, a fixed account would be a must-go option.
- Mitigates Liquidity Crisis: typically, the liquidity issue of a fixed account is considered to be a con. But if you can make a perfect ladder with your deposited money, it will also help in crises by providing liquid cash. So, if you’re are someone who wants to earn interest from a safe investment and at the same time solve your liquidity crisis, a CD account with a well-planned ladder would be the best choice for you.
- Utilization of Resource: The bank invests the money you deposit into your fixed account in different industries and sectors. This amount would be sat lazily at your home otherwise. But by using a fixed account, you will make sure of the utilization of your earned money. You can earn interest and at the same time help the economy of your country to grow.
Things you Should know Before Opening a Fixed Deposit Account
Generally, a fixed deposit account has fewer complications than a savings or checking account. But it would be best if you had a proper plan before you deposit your money in such a long-term investment. Before you sign in the documents of a fixed account, make sure you know all the terms & conditions and w well thought plan for the upcoming future. Here are some pro tips that will help you make an effective plan for your fixed account.
Firstly, evaluate other investment opportunities too. If you want a better return on your invested money, maybe a bank deposit is not a suitable option for you. That is why you should evaluate different alternatives before choosing a fixed deposit. But if you’re concerned about the risk of investment, then go for a fixed account.
Secondly, determine the term deliberately. Once you’ve deposited your money in the bank for a fixed account, you can not withdraw it before maturity. Please determine the term according to your need. Suppose you have $10,000 that you will need next year for going on a vacation. Now, if you want to keep the money in a fixed deposit, your term should not exceed one year. Otherwise, you won’t be able to enjoy the return on your investment.
Thirdly, keep an emergency fund. Shortly, do not keep all of your money in the fixed deposit account. There’s a possibility that you might face financial crises in the future. Keep a portion of your money into a savings account so that you don’t have to pay to withdraw the fixed deposit and face a penalty. Besides, you won’t also have to take any loan and bear the interest if you already have an emergency fund.
Lastly, build a CD ladder. It’s the kind of savings strategy where you diversify your deposited money into a fixed account with staggered maturity dates. [5] This strategy will help you earn high interest by depositing your money in a long-term CD and overcoming a liquidity crisis by keeping a portion in the short-term CD.
Bottom Line
A well-planned fixed deposit account can be a good investment and a great consistent income source for you. Instead of keeping your money lazily or gambling with it, build a suitable CD ladder and utilize your money to maintain its time value.
Related Readings
References
- What is a CD investment – Bank of America;
https://bettermoneyhabits.bankofamerica.com/en/personal-banking/what-is-a-cd-investment - Finding Your Best CD Rates: Long-Term CDs Vs. Short-Term CDs – Forbes;
https://www.forbes.com/advisor/banking/finding-your-best-cd-rates-long-term-cds-vs-short-term-cds/ - CD Early Withdrawal Penalty: Everything You Need to Know – Forbes;
https://www.forbes.com/advisor/banking/cd-early-withdrawal-penalty-everything-you-need-to-know/ - What is a CD secured loan – Time;
https://time.com/nextadvisor/loans/personal-loans/what-is-a-cd-secured-loan/ - CD ladder Guide – Bankrate;
https://www.bankrate.com/banking/cds/cd-ladder-guide/#:~:text=A%20CD%20ladder%20is%20a,in%20a%20long%2Dterm%20CD
I am a finance enthusiast who writes well-researched articles and blogs on business analysis, the financial service industry, and marketing analytics. My writings result from accurate market data and the application of my profound theoretical knowledge about business.