Another Personal Finance tutorial by GenX @ http://www.GenXGenYGenZ.com
This tutorial was first published in 2017 and updated on April 2019 with some minor revisions.
INTRODUCTION TO FIXED DEPOSIT OR TERM DEPOSIT
If you have been saving money by utilizing Savings Accounts that pay pathetic interest rates, e.g. 1% or less, you must be new to my blog and I welcome you to this tutorial.
Fixed Deposit (Term Deposit) is considered one of the safest investment tools offered by banks simply because your Principal Amount is guarantee and the interest rate is fixed for the entire tenure until maturity. Normally, longer tenure means higher interest rate. Having said this, you could even lose your money deposited in FD if the bank goes kaput or our nation goes bankrupt. Currency depreciation or hyper inflation is another story altogether.
Some may say that FD is not good as it can’t beat inflation, well, that may be or may not be the case. But I can tell you one thing, your money in FD is as good as cash (you can withdraw it at any time) compared to money invested into say a property which is not liquid. For example, if you are in the intensive care unit, your property (and even stocks/shares) worth millions of Ringgit may not be used to pay the hospital bills. So, one way to ensure that you have the funds to pay your hospital bills is to have Joint FDs with ALL (I kiasu mah) your loved ones.
For those of you who have medical insurance, I suggest you go check how many days your medical insurance is able to cover the cost if you are in the intensive care unit. For my case, my medical insurance only pays out RM100K per annum which is like equivalent to the cost of 10 days in the intensive care unit, and until age of 75 only!!!
Of course, if one is young and in the process of wealth accumulation, one should also consider higher risk investments like share market where we can earn much more OR lose everything. Same goes for property. You potentially make tons of money over time but not everyone makes money from investing in properties (except maybe for empty/vacant non-converted agricultural land (nominal land tax) where the price is sure to appreciate with time due to inflation).
And if you had bought Bitcoins prior to this year, you’ll be freaking rich if you were to sell them all today (Dec 2017). Too bad for me that I did not follow the super smart Ms. Suraya Zainudin (Malaysia’s Bitcoin Guru) in accumulating Bitcoins despite her sharing about it moons ago when it cost peanuts to acquire Bitcoins at her blog called Ringgit Oh Ringgit. My internet buddy Mr-Stingy, another top personal finance blogger, did purchase Bitcoin in September 2016 and since then has made more than 1000% profit!!! Click here to read Mr-Stingy’s article on Bitcoin where he explained Bitcoin in a way anyone can understand how it works. So, if I had followed these two Malaysia’s Top Bloggers in acquiring Bitcoins, I would be damn rich and globe trotting and not wasting my time stupidly writing this tutorial, hahaha.
The point is, I am not a financial consultant and I am not telling you how to invest your money but this article is purely to teach you a thing or two on how you can maximize your cash reserve by utilizing The Right Fixed Deposit.
First Lesson of the day – start earning more in interest (pocket money) with a mere RM500.
Every single time if you have more than RM500 in your savings account, which you won’t be utilizing it anytime soon to pay your bills, go open a Fixed Deposit or Term Deposit account and start earning 3% (or more) interest rate (in 2017).
Most banks in Malaysia allow you to open a 2 months tenure FD/TD with a mere RM500.
Example where you do not need RM10K to earn 4% above interest rate – HLB Online Pay Day Special FD, During 1st to 7th December 2017, with a mere RM1K you were entitled to 4.2% interest rate!!!
Lesson No.2 – how you earn interest from Fixed Deposit/Term Deposit.
When you are quoted an interest rate for a particular FD tenure, the interest rate is based on per annum.
For example, on 3rd January 2018 you deposit RM500 into a 3 months FD paying interest rate of 3%. Therefore, the maturity date is on 3rd April 2018 (total 90 days).
Interest earned = Principal Amount x Number of Days x Interest Rate Per Annum / 365 days.
Therefore, the interest you’ll earn is = RM500 x 90 days x 0.03 / 365 days = RM3.70
Note, if the maturity date falls on a Saturday or Sunday or even Public Holiday, banks like UOB and OCBC which adopt Statement based Fixed Deposit will automatically adjust the maturity to the next working day (in some instances, UOB may even adjust the maturity date to a day or two earlier so that it matures on a working day). For Certificate based Fixed Deposit, if the maturity date falls on a weekend or Public Holiday, the bank will pay you the extra few days interest when you uplift the FD on the next working day.