A pharmacist, Ibrahim Alabi, had been working for four years. He operated a current salary account where he saved part of his income. At the last check, he had over N3m idle funds in the account but was not satisfied with the charges the bank was deducting from the account .
On several occasions, he had gone to lodge complaints about the charges but nothing really changed.
Having realised that he might not need the funds for the next one year, Alabi decided to transfer the savings into a fixed account that would be yielding interest.
After making enquiries from his bank, he was told that he could either open a separate account for the transaction or simply peg part of the balance in his account to be fixed in a tenored account.
The bank also told him the minimum amount that could be kept in a tenored account, and the percentage interest he would be paid after the fixed period.
A fixed deposit is a tenored account that allows the bank customers to keep a specific amount over a period of time and at an agreed interest rate.
At the end of the agreed period, the depositor may collect his cash back or reinvest it by retaining it in a fixed account to continue to earn more interest.
In most Nigerian banks, the tenure that a depositor is allowed to fix his account is usually between 30 days and one year. Also, the interest rates paid by different banks vary.
However, if there is a need for the depositor to use the funds before the tenure ends, he can withdraw his money but may not get the full interest rate specified for the agreed period.
Fixed deposit is good investment as far as conservative investors are concerned because they offer guaranteed returns and have low or almost negligible risk.
However, before investing in a fixed deposit, you should carefully look at its advantages and disadvantages.
A report by an online journal, letslearnfinance.com, gives some tips on the issue.
*A major advantage of investing in fixed deposit is that it offers guaranteed returns. So as an investor, you will not have those sleepless nights where you keep thinking whether your investments are safe or not and what will be your return. In other words, an investor who wants to have a peace of mind will prefer a fixed deposit account to investing in stock market or commodity market.
*Fixed deposits are very liquid, hence, one can withdrew the money whenever one wants cash for various purposes such as marriage, sickness and other urgent needs. Though a premature withdrawal results in some loss of interest, it is still better than selling stocks or real estate investment where you cannot sell the assets instantly because they are of high value and they are not that marketable. And if you are in an urgent need of cash, then you may have to sell the asset at distressed value rather than its true value.
*Fixed deposits are very flexible in nature. One may have a fixed deposit with a maturity period of one month, one year or 10 years; and one can make a fixed deposit with any amount unlike in the real estate where one needs to invest heavily.
*The biggest disadvantage of investing money in fixed deposit is that its returns are low; and if inflation is very high, fixed deposit investors are the worst hit as the returns from fixed deposit may not be sufficient to cover the high expenses caused by the inflation.
*If one invests all one’s money in fixed deposit, then one may not enjoy the benefits of diversification, which one gets if the money is invested in stock market, real estate and gold.
*As far as taxation is concerned, fixed deposits are taxed at normal rates; hence, one cannot take the tax benefit from this investment.
Seven ways to find the best interest rates
Cash accounts work just like other bank accounts — except you don’t pay any tax on your savings. There are ways to find the best interest rates, compare cash account providers and make the most of your allowance.
Whatever the reason you are saving, everyone has the same question — how can I make my cash work for me? A report by an online journal, mirror.co.uk, gives some tips on how to shop for the best interest rates.
*Have a fixed account
A fixed account protects your savings from the taxman, meaning you can save more with the interest tax-free. If you are willing to take more risk, there are other options available, like stocks and shares.
*Aim for the best interest rate
Some bank rates are low, so you have to search hard. Don’t just go for the first you see. If you want your money to keep its value, you want the cash provider to pay you a rate that at least beats inflation. And the higher the rate, the more you can grow your pot of savings.
You can get a sense of the interest rates using a comparison website. Some interest rates are ‘teaser’ rates, which expire after one year.
* Check with your bank
If you already have an account with a bank, you may be able to get a better deal on your cash. Once you know what rates are out there, check your bank’s website or ask in your local branch.
If you have spent time shopping around for the best rate, make the most of it.
The earlier you start saving, the more the interest builds up, which helps you grow your savings. If you are earning a regular wage, set up a direct debit to your cash so you get into the habit of saving.
You may be able to access your cash instantly, depending on the rules you signed up to. But if you take money out, you cannot claim that part of the allowance again.
*Keep an eye on the time
You could save a huge amount in one year. After that, you can save another funds over the next year. But if your bonus rate has expired, you may find yourself facing disappointing returns on your cash. That is when it is time to start thinking about switching account again.
Types of interest rates
Deposits are a fairly simple product, but banks offer several variations that can benefit you if you do your homework.
Here are the main types of certificate deposits, according to thesimpledollar.com.
Traditional: This locks away your money for a certain amount of time. The longer the term, the better your interest rate, which is fixed. Withdraw money early, and you could face a steep penalty fee. These penalties vary from bank to bank, but a fee equal to six months’ interest is most common on a one- or two-year certificate deposit, according to Bankrate.com
Variable rate: The interest rate on this can change periodically according to certain indexes. The setup varies from bank to bank. You are still guaranteed your initial investment but are vulnerable to fluctuating interest rates. This can be a better bet when you are reasonably sure that rates will go up.
Bump-up: If you put your money in a certificate deposit with a certain term and interest rate, but then the bank offers another CD with a similar term with a better interest rate. You can “bump up” your CD to the new interest rate. However, you can only do this once, and your original rate may be a bit lower than those offered on traditional CDs.
Liquid, or ‘no penalty’: If you need to withdraw your money before your term is up, liquid CDs will let you do that without paying a penalty fee. But, you will pay for this convenience with a lower interest rate.
Callable: You will get a higher interest rate, but the bank reserves the right to “call back” your money and nix your CD before your term is up. So, if your CD has a three-year term and the bank calls it back after two, you lose out on a year of interest.
Zero-coupon: You can purchase these CDs for much less than the face value. For instance, you can get a N500,000 CD for N300,000, but you won’t see any interest until the CD is mature. And you still have to pay taxes on that anticipated interest every year.
Jumbo: True to its name, a jumbo CD is an option only if you have lots of cash on hand, about N1m or more. Your jumbo investment will typically net you a higher interest rate.
Brokered: A brokered CD is simply a CD purchased on your behalf by a financial adviser or broker who does the legwork of finding the best rate. Of course, you will probably pay a fee for this service.