The myth
Keeping your money in for a certain amount of time is probably the most basic concept of time deposits. You’ll need to commit to not withdrawing the amount that you put in for a certain length of time.
In exchange, you’ll get a specified interest rate that is higher than that of a normal bank account. This can make it easy for you to understand how your money can grow.
That’s why many people believe that you have to wait to get your money out from a time deposit.
The reality
When you open a time deposit account through a bank, you’ll be agreeing to certain conditions. Of these, perhaps the most important one is that you’ll be keeping your money in for the term, which is the period of time it takes for the account to reach maturity.
That’s because doing so allow the bank to use your money to generate its own revenue, like by lending it out. In return, you’ll earn interest for as long as the deposit hasn’t reached maturity.
However, you might end up needing the money in the time deposit despite all your planning. If this happens, you’ll still be able to take it out through a process known as pre-termination. You won’t be able to withdraw some of the money you have in it; instead, you’ll be closing the time deposit before the agreed-upon date.
Of course, there are consequences to doing this. Aside from losing all future interest, you’ll also receive less than the full amount of the interest already earned. This is the pre-termination fee, which only applies in situations like this.
The verdict: False.
While agreeing to keep your money in for the specified term is an essential part of investing in a time deposit, you can pull it out early if you really need to. Of course, given the potential impact on your profit, this isn’t something you should do unless you have no other choice.
This highlights the importance of having an emergency fund. This could greatly decrease the chance that you’ll have to do things like pull money out from an investment in case you need the cash, which in turn makes it more likely that you’ll be able to keep following your strategy despite the challenges.
To further hedge against having to pre-terminate your time deposit, you can opt for a product with a shorter term. Depending on the bank, you may find options that mature in months instead of years.
You can even consider investing in multiple time deposits with different terms. This laddering technique (also used in bonds) results in maturity on different months or years, which provides a little more potential liquidity than if you put all your allocated money in just one product.
