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Most savvy savers know about standard savings accounts. Savings accounts allow your money to accrue interest, albeit slowly, in exchange for a few stipulations that make it a bit less liquid than money in a checking account.
But what if you truly want to maximize your interest? What if you want to put your money aside and not have the temptation to pull it out?
Enter the time deposit.
What Is a Time Deposit?
A time deposit is an interest-bearing bank account, much like a standard savings account. Unlike a standard savings account, though, time deposits don’t let you take your money out whenever you want.
Time deposits have higher interest rates than typical savings accounts to make up for the freedom you sacrifice in investing in them.
How Do Time Deposits Work?
On the front end, time deposits work just like any other online bank account. You decide to open one and deposit whatever amount of money you decide is appropriate.
Once that money is in, time deposits differentiate themselves. You commit your money to the account for a period of time, known as a ‘term.’ During this term, you aren’t allowed to withdraw the money without penalty.
Term lengths can vary, with longer terms typically resulting in better interest rates on the money deposited. That being, the shortest terms are typically around a month.
The penalty for early withdrawal varies as well. More lenient accounts might only take a chunk of the interest you’ve earned. Stricter time deposits will charge fees.
Time deposits are used by banks to provide loans. By promising not to withdraw, you give the bank time to loan out the money and make interest on the loan when it is paid off. In a sense, this means you are investing in the bank when you choose to make a time deposit.
What Is an Example of a Time Deposit?
The most common example of a time deposit is a certificate of deposit.
A certificate of deposit is an agreement a bank member makes with their bank to leave a sum of money untouched for a predetermined period.
Nearly all banks and financial institutions offer certificates of deposit, making them among the most accessible form of time deposit available.
>> More: How to Open a CD Account
Time Deposit Account vs. Demand Deposit Account
Time deposit accounts contrast with demand deposit accounts in that the funds are not immediately available to you.
Once deposited, you agree not to withdraw the funds for a set term. Should something change and you make a withdraw, you will face penalties and most likely have to wait before accessing your funds.
Pros and Cons of Time Deposits
There are plenty of reasons people opt into time deposits.
For starters, money in a time deposit accrues more interest than money in a savings account. If you are trying to be strict on saving, you will always make more with a time deposit than you will with a standard savings account, so it just makes sense to commit to a time deposit.
Additionally, time deposits can help you build better financial habits. By forcing you to leave your savings alone for a set amount of time, they can help reduce impulsive or unnecessary purchasing.
As far as investments go, these accounts are also nice in that they are incredibly low-risk. The returns are pretty much guaranteed so long as you don’t pull your money out.
That being said, there are a few downsides to time deposits as well.
The obvious downside is that you don’t have access to your money. If a financial emergency hits, your deposit isn’t there to help. This can mean you have to put expenses on credit cards, which may cost you in the long run.
There’s also a flipside to the safety of time deposits. While they are very steady and predictable, they also aren’t likely to make you rich. There are plenty of investment opportunities that, while slightly riskier, can yield far greater returns.
Finally, the interest you earn is taxable, meaning the already modest returns are even smaller in the end.
How to Get Time Deposits
The first place to check is at your bank. Most bank accounts offer some sort of time deposit, so it’s likely the bank you already use can help you.
If you don’t want to use your bank, a brokerage can help connect you to the right institution. Through them, you can compare and find the time deposit that best fits your financial needs.
Alternatives to Time Deposits
Short-term bonds are funds that invest in various instruments. These range from governmental to corporate.
Short-term bonds typically have a maturity period between one and three years. They tend to be quite safe and, as such, are comparable to time deposits.
Long-term bonds are basically short-term bonds with longer maturity periods. Where short-term bonds only take a few years, long-term bonds don’t reach maturity until they’re between ten and thirty.
The longer maturity comes along with a higher return. Interest rates tend to be better for longer bonds. If you have the patience, long-term bonds can be a great alternative to time deposits.
>> More: What Is a Patriot Bond?
Dividend stocks are among the most common investments people make. These are stocks where the company regularly pays out to stockholders. If you’ve bought or traded stocks before, you’re already familiar with dividend stocks.
Dividend stocks are riskier than time deposits but have much more return potential. They also give you the option to diversify, allowing you to the risk around to match your comfort level.
High-Yield Savings Account
High-yield savings accounts are typical online only. They tend to offer twenty or more times the standard savings interest rate.
The downside of high-yield savings accounts is that they rarely have branches or ATMs. Still, setting up online transfers is quite easy, so the money is still accessible.
Bottom Line: What Is a Time Deposit
Time deposits are a great way to get a bit more out of your savings without adding any risk. They have higher interest rates, and you can choose a term that works best for you.
That being, riskier investments do have a much higher potential for rewards. If you’re looking to strike gold, time deposits may not be for you.
Consider all your different investment options and your level of comfort with risk so you can find the balance that works best with your finances.