A fixed deposit is a great way to save. It allows you to earn a guaranteed, competitive interest rate and not have to think about setting money aside on a weekly or monthly basis. You invest a set amount over a specific period of time and then watch your investment grow, according to www.bankfive.com.
There are a variety of fixed deposit term lengths available at most banks. Short-term fixed deposits typically range from six months to a year, while longer-term fixed deposits can have lengths between 15 months to five years or more.
Some banks offer fixed deposit in six-month, one-year, 18-month and three-year in some cases with a minimum deposit requirement. Some banks also allow you to make additional deposits at any time.
While fixed deposits can be a safe and solid investment tool, there are some common mistakes with fixed deposits investing that could end up costing you. Here are some tips to help avoid them:
- Think twice before committing to long-term fixed deposits: Generally, the longer the fixed deposit term, the higher the interest rate. Before locking in that attractive rate with a five-year or 10-year fixed however, you should do your homework first. The last thing you want to do is commit to a lengthy fixed deposit right before the federal reserve increases rates. It is a good idea for fixed deposit investors to keep an eye on federal reserve news headlines to understand when rates might fluctuate. The Fed’s rate-setting committee meets regularly each year to decide whether or not it will modify the federal funds rate.
It is also important to note that significant increases in fixed deposit rates typically occur over the course of several years. Tying up your funds over a long period could prevent you from taking advantage of fixed deposits with higher yields, if they become available further down the road. While it is possible to pull your funds out of a fixed deposit before it matures, doing so usually results in penalty fees – which can take a real bite out of your interest earnings, and in some cases even your principal!
- Don’t fail to diversify your fixed deposit investments. Although “diversifying” in the investment world typically mean having different types of investments such as stocks, bonds, and fixed deposits. You can also diversify your fixed deposit investments specifically.
This is where fixed deposit laddering comes in. Basically, fixed deposit laddering is when you set up multiple fixed deposits that will mature at staggered intervals, so you will have access to your fixed deposit funds on an ongoing basis. Fixed deposit laddering typically involves a mix of short and long-term fixed deposits, so you can reap the benefits of longer terms with higher rates, while still having other fixed deposits maturing on a regular basis.
- Don’t forget to shop around for the best rates. There are plenty of banks out there offering fixed deposits. Whether you are more comfortable putting your funds into a local, regional, or national bank, it pays to evaluate a few different financial institutions to see what fixed deposit rates they have to offer. Trying out the bank down the street instead of the bank you have your current account with might make sense if they are offering a more competitive rate. Be sure to ask your bank about any fixed deposit specials they might be offering too!
- Know when your fixed deposits are maturing. Once your fixed deposit matures, you have a chance to withdraw your funds, or move them to another fixed deposit or investment. This is a great opportunity to see if there are higher rates available for your savings. If you don’t step in and inform your bank what you would like to do with your fixed deposit however, they will typically automatically roll your funds over to a new fixed deposit term.
If this happens, you could miss an opportunity to invest in higher-yielding fixed deposits or take advantage of other investment options, such as stocks, that could provide stronger returns. While there are certainly scenarios where it might make the most sense for you to roll your funds into a new fixed deposit with your existing bank, it should be a decision you make based on your current financial picture. Don’t let your bank decide for you!
- By keeping these tips in mind, a fixed deposit can be a worthwhile and fruitful investment. Always remember though that it is best to consult with a tax advisor before making any major financial decisions.
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