One of the most common financial products you can use to grow your money over time is a time deposit account, which is essentially a high-yield savings account. The funds you put into a time deposit account are locked in for a fixed term during which they earn interest. When your term ends, you’re free to withdraw from the account without incurring any penalties.
If you’ve been wondering whether a time deposit account is a good investment product for you, simply read on. This handy guide will walk you through all you need to know about time deposits, the pros and cons of keeping them, and the kinds of investors whose needs they serve best.
Understanding Time Deposit Accounts
In the Philippines, time deposits are deposit accounts like regular savings or checking accounts. The main difference between a time deposit account and other bank accounts is that time deposits earn interest at significantly higher rates. As a tradeoff, however, you must wait until after your holding period ends to withdraw money from a time deposit account.
When determining whether a time deposit is right for you and which bank you should potentially open an account with, you should primarily look at three factors:
- Deposit amount – The deposit amount refers to the amount of money you’re willing to store in your time deposit account for a fixed period. This needs to be an amount you can comfortably set aside without hurting your monthly living expenses, emergency fund, and savings.
- Interest rate – Your interest rate determines how much money you’ll earn on your initial deposit amount at the end of your fixed term. Different banks will offer different interest rates, and your interest rate may also rise or fall depending on how long the term you choose is and how much money you’re willing to commit.
- Holding period – As the name implies, the holding period on your time deposit refers to the length of time you let the bank keep your money locked down. Most banks in the Philippines offer holding periods of anywhere between 30 and 360 days for time deposits.
In general, putting more money into your time deposit will net you a higher interest rate. As a result, time deposits are a good investment option for people with low risk tolerance and a preference for secure returns. Renewing your time deposit every year or every few years is another way to increase the interest you earn on your initial deposit amount. As interest rates tend to vary over time and from bank to bank, it’s best to discuss optimal renewal terms with your bank of choice.
Benefits of Time Deposit Accounts
The money you put in a time deposit account will be locked in for a significant length of time, so it’s important to familiarize yourself with the pros and cons of this particular financial product before committing to the investment. Some of the primary advantages that time deposits offer include the following:
Low Deposit Amount Requirements
Depending on your chosen bank and the terms it offers, you probably won’t need a huge sum of money to set up a time deposit account. Some banks even allow you to open time deposits with as little as PHP 1,000.
Low-Risk Investment Option
Unlike other conventional assets like stocks and real estate, time deposits guarantee a return on your initial investment after the holding period ends. This means that there’s no danger of losing money unless you terminate your account early. Because of their low risk profile, time deposits are ideal for conservative investors who prefer to grow their money without taking on significant risk.
Higher Interest than Regular Savings Accounts
Most savings accounts in the Philippines earn less than 1% interest, and even high-interest savings accounts only earn a little over 1%. Time deposit accounts, meanwhile, can earn as much as 5% interest depending on the account holder’s chosen holding period and deposit amount.
Drawbacks of Time Deposit Accounts
Of course, it’s equally important to be aware of the possible disadvantages of time deposit accounts, such as:
Can’t Withdraw Money Freely
The holding period on a time deposit account in the Philippines can range anywhere from a month to a little under a year, though some banks offer terms as long as 5–7 years. The funds you initially place in your time deposit account must remain with the bank for the entire duration of your chosen term. While you can withdraw these funds before the end of your term in the event of an emergency, your bank may charge you a pre-termination fee—usually around 10–50% of the interest earned.
Can’t Make Additional Deposits
Unlike with savings or checking accounts, you can only make one deposit into a time deposit account. Any extra money you want to invest after opening your time deposit will need to be funneled into other investment channels or into an additional time deposit account.
If you already have enough money saved for emergencies and basic needs, a time deposit account can be a worthwhile investment to help you meet short- and medium-term financial goals. Educating yourself on time deposits and other investment products will help you develop an investing strategy that works well with your monetary situation and savings objectives.