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Are time deposits worth it? Here's what you need to know

POSTED ON NOVEMBER 03, 2023    

Time deposits are worth considering if you want steady, predictable growth for your money. Returns are fixed so you’ll know exactly what you’ll get at the end of the term.

With minimal risks, the potential for your money to grow is also relatively modest. This leads some people to believe that their money is better off invested somewhere other than in a time deposit.

Before you cross out a time deposit from your options, you might want to take a closer look at its features. We’ve listed a few things to consider so you can make an informed decision. Read on below.

 

What happens to your money in a time deposit?

To know if a time deposit is worth adding to your portfolio, you should first understand how it works. Here’s an overview of the process in 3 steps:

Step 1: You’ll open a time deposit through your chosen bank. You can set how much money to deposit and for how long (also known as the term) it will stay in, within the bank’s investment limits.

Step 2: Your money will be locked-in for the duration of the term and you won’t be able to partially withdraw from your deposit.

Step 3: You’ll get your money back when the term ends and your time deposit matures. You might be able to choose between receiving the interest on a fixed schedule or upon maturity.

If you need your money before the term ends, you can apply for pre-termination. Keep in mind that pre-termination means you’ll close the account and pay a certain penalty.

Learn more about how time deposits work in this article.

 

How are your time deposit earnings calculated?

The interest rate determines how much you’ll earn from a time deposit. Banks usually offer fixed annual rates, which typically depend on the amount you’ll put in and the length of the term.

Here are the factors that affect earnings from time deposits:

  • Deposit amount
  • Interest rate
  • Term
  • Withholding tax (20% for time deposit accounts)

Keep in mind that other fees may apply, especially if you pre-terminate your time deposit account.

Some banks or banking apps offer online time deposit calculators. These will let you know how much your money could grow if you keep it in a time deposit until maturity.

 

How to know if a time deposit is worth your money

Revisit your goals and the assets in your portfolio to determine if a time deposit suits you. Here are a couple of questions to use as your guide:

 

What is the purpose of your time deposit?

Know your goal for the money you’re planning to invest. It could make sense to put money in a time deposit if:

  • You’re looking for an investment with guaranteed returns at a fixed rate.
  • You want a stable asset that can balance out the more volatile ones you own.
  • You’re OK with earning a relatively modest amount.

If you want to grow your money faster at higher rates, you might need to consider other investments. Keep in mind that a higher growth potential also means an increase in possible risks.

 

What are the alternatives?

Scope out your other investment options to see how time deposits compare. Weigh different choices by finding out the following:

  • Risk suitability – Learn what might happen to your money in each investment. It’s best to go with the option that won’t expose your money to more risk than you can handle.
  • Growth potential – Estimate how much you might earn from each investment vehicle. Then, check which one could offer enough profit to help you reach your target amount.
  • Portfolio compatibility – Review your portfolio to check what else it might need. Any room for improvement, such as more stability or variety, can point you to the ideal asset to help fill the gaps.

As you diversify your portfolio, you may find that there’s opportunity to add more than one investment among your options.

Be careful not to make investment decisions based only on how much you might earn. There are other factors to consider and features that could make an investment well worth your money.

 

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