Preparing for the Future: What is the Advantage of Time Deposit?
In your quest for a better financial future, you may be wondering what different types of financial instruments are available to you. Each bank offers a different range of products and services. Although, most if not all, offer a time deposit.
Now, you may be thinking, “What is a time deposit account?” A time deposit account is a locked-in savings account that banks offer to allow you to earn at a higher interest rate than normal. You’ll grow your money at a fixed rate, but you won’t be able to withdraw your money without accruing fees.
Time deposits are an excellent way to let your money work for you without having to lift a finger. Invest your money into a time deposit account and reap the many advantages that it can offer you.
But before all of that, let’s go through the basics of what a time deposit is first.
What is a Time Deposit?
A time deposit is a type of investment vehicle that locks in your money at the bank for a certain period of time. During this time, your money will be earned at a fixed rate that is much higher than a typical savings account.
Each bank offers its own time deposit product. Time deposits per company can vary in interest rates, terms, and minimum investment amount. Some financial institutions have time deposit options ranging from one month to five years and one day.
Depending on your investment horizon, it’s best if you look around and find the right institution and product before committing.
How Does a Time Deposit Work?
Now, you may be wondering how a time deposit account earns money. When you invest your money in a time deposit account, the bank uses this money for its operations and products.
A good example of this is the lending products that banks offer. When banks offer loans to their clients, they charge interest. The money that the bank uses to pay you comes from the interest paid by the bank’s lending clients.
What are the Terms You Should Know?
As you look around for time deposit products, you’ll frequently encounter a couple of banking terms. In this section, we’ll help you decode these terms so you can make an informed decision before making this investment:
Minimum Placement
The term minimum placement is the lowest amount of money required by the bank to open a time deposit account. This is where the bank will be basing the interest of this investment.
Depending on the financial institution, the minimum placement can vary.
Term
The term is the period of time that the money will be held by the bank. Think of it as a lock-in period.
Time deposit terms can range from 30 days to five years.
Interest Rate
The interest rate is the percentage at which your money will earn during the agreed term.
Each bank has its own set of rates. A good rule of thumb to remember about interest is that the longer the term is, the higher the rate will be.
Fund Access
Fund access is the way you can deposit and withdraw your funds from the bank.
Some banks will only allow you to withdraw your funds over the counter, while others will allow you to access your investment through online channels.
Transaction Record
The transaction record is the official confirmation that the bank has received the funds you’ve placed. On this record, you’ll see the set interest and the terms of your time deposit.
Documentary Stamp
At the end of your time deposit, you’ll need to pay for documentary stamps.
Banks will not charge you for this fee at the start of your contract, instead, these fees will be deducted at the end of your time deposit term.
The documentary stamp fee is 1.50 pesos for every 200 pesos deposited.
How are Time Deposit Interest Rates Computed?
Because time deposits have a fixed interest rate, they’re computed in a certain way. To help you understand how time deposits are computed, we’ve made a sample computation for you below:
Amount invested: Php 100,000
Interest rate: 1.750%
Term: 3 years
Annually, you’ll receive Php 1,750 in interest, but since the term of this deposit is for three years, you can only withdraw this amount once the contract has lapsed.
After three years, your money should have earned Php 5,250. Leaving you with a total of Php 105,250. However, since the government collects a certain portion of your earnings for taxes, this is only the gross amount.
The government will withhold 20% of your total earnings. 20% of Php 5,250 is Php 1,050. Which means your net earnings are Php 4,200.
That means the amount you get to bring home is Php 104,200.
Is Time Deposit a Good Investment?
Depending on your risk appetite and your goals, a time deposit can be the perfect investment tool for you.
Before you commit to this financial product, it’s essential that you understand what your goals are and what this money will be used for.
For example, if the money you’re investing into the time deposit is for your emergency funds, this may not be the right option because you won’t be able to access these funds until the end of the term.
But, if your time deposit account is for your insurance payment for next year, this may be a good investment vehicle. This is because you won’t need to access this money until next year and it’s a low-risk financial instrument that can help you grow your money.
Time deposits can be an extremely useful financial tool if wielded well.
Listed below are the different advantages and disadvantages of using time deposits as an investment tool.
Advantages of Time Deposit
Here are some of the advantages you can reap when you add time deposit to your investment portfolio:
Fixed Interest Rate
Time deposit guarantees that you’ll receive the amount dictated on your transaction record at the end of the time deposit term.
Unlike stocks, which are volatile, time deposits will yield a set amount of money, much like government bonds.
Insured by PDIC
Unlike stocks and other investment options, time deposits are insured by the Philippine Deposit Insurance Corporation (PDIC) for up to 500,000 pesos.
So, in the off-chance that your chosen financial institution closes down due to unforeseen circumstances, you can still rest easy knowing that your hard-earned money is protected by the PDIC.
Enforce Good Money Habits
Because time deposits have a lock-in period, you can’t spend your money while it’s invested. This means you won’t have access to this money and you’re less likely to spend this money on impulse purchases.
In fact, if you want to continue the habit of putting your money into a time deposit account, some banks will allow you to roll over your time deposit for another period of time. Allowing you to harness the benefit of compounding interest.
Disadvantages of Time Deposit
Even if time deposits have many advantages, it’s still good to remember that there are trade-offs to this investment vehicle.
Here are some of the disadvantages you can experience from investing in time deposits:
Penalty on Early Withdrawals
Because time deposits are locked in for a certain amount of time, there is a penalty on early withdrawals, in case you need to access the funds earlier.
Early withdrawal penalties can vary from bank to bank, but it can lead to a reduced amount of interest collected. Penalties can also affect your principal amount.
Lock-In Period
When you put your money into a time deposit account, you lock it in at the term and interest rate given. So, if after a couple of days after investing your money the time deposit rates go up, you won’t be able to benefit from this rate.
Can’t Increase Deposit
Unlike other investment instruments where you can top up your investment, time deposits do not allow you to increase your investment fund. If you deposit a certain amount of money, that’s it. You can’t increase or decrease this amount once you enter the contract with your bank.
Are There Different Types of Time Deposit Accounts?
Each bank may have multiple types of time deposit products available. These products are often differentiated by the terms and minimum amount requirements.
Some financial institutions also have foreign denomination time deposits available. This type of product is perfect for OFWs and individuals who have a large amount of foreign currencies at their disposal.
For reference, here are some of RCBC’s time deposit products:
PHP Time Deposit
The PHP Time Deposit’s terms range from 30 days to five years and one day. The rates go between 0.500% to 2.500% and the minimum amount varies on the terms of your deposit.
For the 30-day to one-year product, a minimum deposit of Php 5,000 is required.
For the two to five-year term, a minimum amount of Php 100,000 is set.
USD Time Deposit
RCBC has a USD Time Deposit available for those with a surplus of this currency.
The terms of this time deposit range from 30 days to five years with interest rates ranging from 0.250% to 2.500%. A required minimum deposit of USD 1,000 is needed to proceed with this contract.
Peso Green Time Deposit
RCBC’s Peso Green Time Deposit helps finance projects under RCBC’s Sustainable Finance Framework for a more environmentally sustainable future.
The Peso Green Time Deposit requires a minimum amount of Php 5,000. This product has rates ranging between 0.750% to 1.500%. This rate depends on the tenure and the amount of money that’s deposited.
RCBC’s Peso Green Time Deposit has terms ranging from 30 days to one year.
Who is a Time Deposit Account for?
There are different time deposit accounts available and if you feel like this financial instrument is for you, then you should answer the following questions first to ensure that you’re choosing the right product:
- What is my risk appetite?
- What are my goals with this money?
- When will I need this money?
- Is it okay if I don’t have access to this money for a while?
- Have I chosen the right bank for me?
- Have I compared this bank’s rates with other products?
Once you’ve answered these questions, then you should have an idea whether this product is right for you or not.
What are the Requirements for a Time Deposit Account?
Depending on the type of account you’re opening and the financial institution you’ve chosen, there may be different documents that you’ll need to secure.
Here are the requirements you should prepare once you’ve chosen your financial institution:
- Two copies of 1x1 ID photos
- Two valid IDs
- Tax Identification Number (TIN)
Once you’ve secured these requirements, you’ll need to fill out a new time deposit placement form and submit it to the nearest branch of the bank you’ve chosen.
Before you submit your requirements, we recommend that you come prepared. Ideally, before you go to your nearest bank to open a time deposit account, we highly encourage you to read through the time deposit instruction form and write down any questions you may have. That way, the bank professional who’ll be helping you open your account can answer any questions you may have.
Taking a Secure Leap With a Time Deposit Account
Throughout this article, we’ve told you all about the different types, advantages, and disadvantages of a time deposit account.
But just for a tldr; time deposits are a secure type of investment that allows you to earn much higher than a savings account. However, during this time, you won’t be able to access your money as freely as you would in a savings account.
There are different time deposits available on the market, so it’s best if you look around first before committing to one. Knowing your options and understanding which one works best for you is essential to your financial growth and is key to making better financial decisions. After all, time deposits can range from 30 days to five years.
If you’re set and you’ve submitted your requirements to the nearest bank branch near you, then congratulations! You’re officially a time deposit account holder and you’re one step closer to securing your future.
