At first blush, time deposits and regular savings accounts are a lot alike. You go to a bank (or an app), open an account, deposit your money, and let it earn interest.
If you take a closer look, you'll find out key differences between these products. Some things to consider include the potential for growth, access to your money, and possible risks.
To help you evaluate each option, here are common questions to ask:
1. How much will my money grow?
The interest rate determines how much you’ll earn from both a savings account and a time deposit. This is where time deposits may have an advantage.
Most savings accounts offer interest rates lower than 1 percent. Time deposits tend to offer higher rates since your money will be locked-in with the bank for a certain period, usually ranging from 90, 180 to 360 days.
The interest rate of a time deposit will usually depend on how much money you’ll put in and the duration of the term. The term is the length of time the bank will hold your money.
Once the term ends, you can choose to put your money in another time deposit. This is called rollover and it allows your initial deposit plus interest earned to keep on compounding.
2. Can I withdraw my money?
With savings accounts, you can take your money out over the counter or via automated teller machines anytime with little to no fees. You only have to consider withdrawal limits and the maintaining balance, if there are any.
This is not the case for time deposits. You won’t be able to withdraw during the agreed-upon term, some of which go for as long as 7 years.
Pre-termination is an option if you really need the money. This means you’ll have to close your time deposit account prematurely and pay certain penalty fees.
This is why time deposits are only recommended if you have no immediate need for the money. It’s best to have accessible savings or an emergency fund for unplanned expenses to make sure your time deposit serves its purpose.
3. Are there any risks?
For both interest-bearing savings accounts and time deposits, rates are fixed and returns are guaranteed. They are also covered by the Philippine Deposit Insurance Corporation (PDIC) for amounts up to P500,000 per depositor, per bank.
PDIC ensures you’ll get your money back even if the bank closes down, though conditions apply.
Since time deposits typically offer higher interest than savings accounts, they are ideal for conservative and beginner investors who want to grow their money while taking on minimal risk.
Fixed returns are great for predictability, but they can also be limiting. There’s no opportunity for your time deposit to earn more than the fixed interest during its term.
Another thing to consider is inflation. Money in a low-interest savings account may not be able to keep pace with rising inflation, which could affect its purchasing power.
On the other hand, time deposits can preserve the value of your money and even increase it if the interest is high enough.
4. Which one is better?
With all things considered, should you open a time deposit or is your money better off in a savings account?
It may not be a case of one being better than the other.
Each of them serves a unique purpose and offers depositors different benefits. Within these two categories, there are a lot of other choices with their pros and cons.
The best option may come down to the product that meets your needs from a bank that you trust.
If you’re looking for a way to earn that’s passive and low-risk, opening a time deposit may be better than letting all your money sit in a plain savings account.
