There are still plenty of people who get confused between a fixed deposit and savings account. What are the differences? Basically, a fixed deposit is the type of account where a person deposited a fixed amount of money for a fixed period of time until maturity. A savings account is pretty much as the name suggests: an account where a person could deposit and save his or her money, minus a fixed amount or period. A fixed deposit is normally opened by individuals or organisations with a surplus of money and would like to grow the funds, while a savings account is usually opened by individuals who are salary earners or small traders. Each of these accounts has its own pros and cons:
- FIXED DEPOSIT ACCOUNT
• High interest rates – You’ll get higher interest rates with fixed deposits that you could earn compared to a savings account.
• Secured future – Depending on how long you’ve deposited your money and the bank that you’ve chosen, you can assume your future to be quite secure. The longer you leave the money, the more you’ll reap the reward once they reach the stage of maturity. A fat interest sum awaits you.
• Lower risks compared to other types of investments – Compared to other types of investments like stocks, of which you could lose the initial value of the funds that you’ve invested, a fixed deposit poses a low risk of you losing money.
• No inflation protection – There is no protection against inflation with a fixed deposit.
• No withdrawals allowed during the period – Once you’ve started depositing your money, you can no longer touch it until they reach the maturity stage, which could be months or years away. You’ll not be able to use the funds in case a financial crisis strikes.
• High interest rates have higher risks – While a high interest rate could earn you a fat amount of money, it could also mean that it comes with higher risks. Be careful when choosing the right bank for saving.
• Income tax – The interest on fixed deposits is considered to be an income and is therefore taxable.
- SAVINGS ACCOUNT
• Valuable earning potential – Though the interest rates of a savings account are much less compared to fixed deposits, it still gives you a valuable earning potential. Banks with lower overhead expenses tend to offer competitive rates.
• Daily interest compound – Certain banks compound your interest daily, which means your balance could grow faster compared to accounts with monthly or yearly interest compound.
• 24-hour access to funds – With a savings account, you can easily have access to your money anytime. This would be great in times of emergencies where you might need to use your money.
• Lower interest rate – Savings account generally pays lower interest rate.
• Monthly maintenances and bank charges – Certain banks will impose additional fees on your savings account. Different banks will also have different terms and monthly maintenance fees. Choose the one with no maintenance fees.
By distinguishing the pros and cons of each account, you’ll be able to figure out which one would effectively benefit you the most, whether you’re trying to achieve a short- or long-term financial goal. Depending on your goals, needs and financial situation, one of these accounts may be better than the other. However, both accounts are considered to be a fundamental tool when it comes to managing your finances, so choose wisely.