What is a fixed deposit account?
A fixed deposit account is an account that most banks offer with a fixed percentage interest rate. If you put money in, you usually, already at the time of deposit, are told how much you get back after, for example, three years. A fixed deposit account is a good alternative for those who want to save long-term and who are willing to lock in their money. This option is safer than stocks and has a better return than a regular savings account.
If you deposit, for example, $10,000 in a fixed interest account of 3% with a fixed term of 5 years, you will receive 3% * 5 years * $10,000 = $1500 in interest minus tax.
Best fixed deposit account
Which fixed deposit account is best for you can of course vary somewhat, but in general I recommend that you choose a fixed term with a deposit guarantee.
The risks are estimated to be low and therefore this type of account can be considered a relatively safe investment.
It is common to use fixed-rate/deposit accounts if you need to save for a specific purpose, such as a cash contribution for an apartment or for parents who save money for their children that they can have at their disposal when they reach adulthood.
If you know that you have poor financial discipline, this can also be a beneficial form of savings.
Do not leave the money in a bank account without interest. Then inflation eats up your money and you become poorer over time.
You only make one deposit
A single deposit is what is required to activate your fixed deposit account.
Once that deposit is made, you just need to wait for your chosen time period to pass before you get your money back with interest.
This is a clear advantage for the fixed deposit account because that way you do not have to make recurring deposits. Your money is locked until the date you have chosen to withdraw your saved money.
To tie up money in a fixed interest rate/deposit account
What is a fixed deposit account? A fixed deposit account is like a regular savings account, but here you instead choose to tie up the money for a period that suits you.
Therefore, a fixed deposit account is suitable for you who know that you can save the money, or if you have a specific savings goal and date.
You often get the best savings rate on a fixed deposit account because you choose to tie up your savings for a certain period of time.
Usually these are different time periods of between 3 months to 5 years, you can of course choose your savings horizon.
How high the savings rate will be depends on how long you choose to tie up the money.
“The interest rate does not sleep.” – The secret behind the interest rate effect
Remember that you have to deposit the money in a lump sum, that is, the entire amount at once. When you deposit the money, the account is activated and the lock-in period begins to work towards the end date when you can withdraw your money again.
The advantage of a fixed deposit account
The advantage of a fixed interest rate/ deposit investment is that you get a better savings rate as a reward because you choose to plan your savings.
The individuals and companies who have an overview of their finances can make the decision to save money by tying them up.
It pays off for both you and the bank like this:
- The bank’s risk is lower because they know how long they can use your money
- You get a higher savings rate because you promise to do without the money
Disadvantages of a fixed deposit account
There are few disadvantages to using a fixed deposit account. What I can mention is that you have to deposit a lump sum at once and therefore be out with the full amount.
Another disadvantage may be that you do not get your money back before the set end date has passed. This can mainly be a problem if you end up in a financially difficult situation.
Therefore, it may be a good idea to make sure that you can really afford to save the intended amount, even in unforeseen situations, before completing your account activation.
Interest on a fixed deposit account
Many banks and deposit companies can compromise on the fixed capital rule, ie you can withdraw from the account during the term.
But then you instead get a lower savings rate because you break what you agreed on.
If you want to be able to withdraw unlimited money from the account, you benefit from choosing a variable savings account instead.
It also pays to save monthly in a savings account that has a variable savings rate because you need to make a deposit every month.
Usually, the interest rate on a fixed-rate deposit account is higher than normal savings accounts. You can expect interest rates of between 2-8% depending on whether you choose an account with a deposit guarantee or not.
Fixed deposit accounts are usually a popular form of savings for their children because you know what you will get for savings when the term is over.
An alternative for you who want to learn more about saving is to read about stocks and mutual funds that can provide more returns over a ten-year period.
Having the money in a bank account without interest is not recommended, but feel free to transfer your salary to a savings account with savings interest.
What return can you get?
There is no general answer here that applies to all accounts with a fixed interest rate/ deposit. How much you can expect to pick out in profit depends mainly on two factors.
Secondly, how large the amount deposited amounts to and your planned time period before the money is to be paid out.
This can easily be explained by the fact that larger sums over a longer period of time give you a larger return compared to lower amounts over a shorter period of time.
In general, fixed deposit accounts have the best interest return compared to variable savings accounts and the reason for this is that you tie up your money over a slightly longer period of time.
There is a difference in a high interest rate/deposit account
The difference between a fixed deposit account and a high interest rate account is quite large.
An account with a fixed interest rate is usually a safer alternative, while an account with a high interest rate return entails a greater risk (as there is no deposit guarantee).
Of course, you can earn quite large sums with the help of a high interest rate account and interest on the interest rate effect, but as I said, this is associated with greater risks.
For that reason, a fixed deposit account may be preferable if you want to be pretty sure of getting a return when your money is picked out.
Start by locking in the money for 3 months
If you feel unsure about how long you can do without your money, you can start with a fixed interest account for 3 months.
That way, you get an idea of how the account works and how it feels to lock in money for so long. If you then think that there are no problems, you can choose a longer time period of 1 year or 2 years.
For those of you who have poor discipline with your savings, fixed-rate/ deposit investments fulfill an important function because you cannot consume the savings capital.
It teaches you to deal with the money you have, which makes it easier when you have a specific savings goal.
Common goals for saving can be a car for the 18th birthday, cash contribution to the apartment, a trip or house renovation.
Always compare fixed deposit accounts
Always compare the interest rate on fixed deposit accounts so that you know that your money is invested wisely. Do not leave your money in a salary account or regular bank account without a bank interest rate.
Then it ends up with inflation eating up about 2% of your money every year. Therefore, it is important that you start saving wisely.
Is the best interest rate on a fixed deposit account?
Yes, in general, fixed-rate/ deposit accounts usually have the best savings rate.
This is because you tie up the money and promise not to touch it for an extended period of time. This means that the bank or deposit company can safely dispose of your money.
The capital can be used for expansion or new lending. Companies usually see a higher return on the money they borrow from you. Therefore, they can pay a high interest rate on fixed rate accounts.