Sunday, April 03, 2016

Saving Account vs Fixed Deposit

This was taken from my ex-student's facebook-status. My comments are in red.

Savings Account versus Fixed Deposit:

Failure of basic personal financial management choice.

First of all, this post is not to offend anyone in any manner. This intended to inform you how we (especially Malaysians - bitter truth) fail to make the very basic choice of increasing our wealth.
I spoke to a couple of friends of mine in these few weeks about their personal financial management. Some of them has decent financial ability (in the context of a student). 'Big financial ability' means they do have decent amount of money in their bank account.

TEH : Most of students got their money from parents. Unless they worked part-time, earned their own pocket-money and SAVED them ... those more privileged-students need to understand the VALUE of money. Well ... the students who worked part-time and earned their savings will do much better financially (generally) than those not.

However, when I asked them why don't they save their money in Fixed Deposit instead of savings account, the first few questions popped out of their mouth was 'Isn't it risky?', 'What's the difference?', 'If it is a better financial product, why do people still save money in savings account? Means there is something chicky, isn't it?

It is really saddening for me. The basic knowledge of financial freedom is not known to most of us.

1) What's the difference between savings account and fixed deposit?

Savings account, as its name suggests, is an account for us to save our money. The minimum money for us to put in savings account varies from bank to bank, some starts from as low as RM10!

The return we will get from saving money in savings account (in Malaysia) is typically between 0.1% to 0.3% per annum (per year).

We can withdraw money whenever we want, at any amount at our own discretion.

The most liquid financial product (the easiest way to deposit and withdraw money).

Fixed deposit, in contrast to savings account, is a financial instrument where we 'lock' our money for a promised period of time with the bank, from as low as 1 month to as long as 60 months (or even more!).

The minimum money for us to put in savings account varies from bank to bank and the tenure as well. Some starts from RM10000 for 1 month and some starts from RM500 for 3 months.
The return we get from saving our money in fixed deposit (in Malaysia) is typically between 3% to 4% per annum, depending on the tenure as well. To put it simple, the longer the tenure, the higher the return is.

We can withdraw money whenever we want, but no partial withdrawal is possible. This means that, if we fix deposit RM5000, we have to withdraw RM5000 and basically we will lose all the interest if it is prematurely withdrawn. YOU DON'T LOSE THE RM5000 (CAPITAL), ONLY THE RETURN (INTEREST).

I view this as liquid as savings account as well. Will explain this later.

TEH : Yes, generally speaking ... FD(fixed deposit) giving us better interest than the SA(saving account). If one have ASB a/c, we should put our money there as it yields much better interest (about 6-7% p.a). It is liquid too. ASB is where my cash-portfolio is. It is under my wife's name and the risk would be ... if my wife runs away? haha.

Isn't it risky?

Hell no! There is totally no risk associated with fixed deposit, especially in Malaysia with all the law in place and PIDM insuring your deposit with bank. So, why bothered to switch your savings from savings account to fixed deposit?

If that's the case, why do people still want to save money in savings account?

This is a universal question, in which I failed to answer until few months back.

The answer is simple, CHOICE.

Even I had this issue of switching my money from savings account to fixed deposit. The laziness of doing so is one issue, the mindset of 'what if I need my money tomorrow?' is another. But once I started practicing to save my money in fixed deposit, the mindset simply changes to 'no, that money is for saving purposes, don't touch it!'. And even if I need the money, I can just withdraw it.
So, why bother so much to save in fixed deposit?

TEH : Yes, the main reason to put our money in FD (besides higher interests rate), is to FORCE us to SAVE. As many of us are into consumerism and buying-mentality, to save that 'extra' is a great challenge itself. PAY YOURSELF first (at least 10% of our income) needs to be implemented here ...

Example : If I m earning RM4000 .... then RM400 should be placed into SAVING ACCOUNT, accumulate it to ... say RM1200(RM400 x 3) and put them into the FD (say for 3months) and then consolidate it into another new FD a/c with RM2400 plus the interest ( another RM400 x 3). By end of the year, we will have RMRM4800 plus the interests. Then by next year, put RM4800 + interest into a one year tenure and grow the next 3-month of your 10% saving into a new FD.

Got the idea? This is basic ... simple and do-able.

It is basically the return.

If I save RM10000 for 10 years in:

- Savings account, with 0.3% return per year, at the end of year 10, there will be
10000(1.003)^10 amount of money in my account, provided I reinvest the money I get from first year to second year and so on (compounding effect).

- Fixed deposit, with 3% return per year, at the end of year 10, there will be 10000(1.03)^10 amount of money in my account, provided I reinvest the money I get from first year to second year and so on (compounding effect).

Am I hiding something?

Fixed deposit does have an issue. You can't do partial withdrawal and if you do so, you won't get your return for the year. Basically, you might need to withdraw your money within a year. There is a solution to this. Banks do provide 1 month, 3 months, 6 months, 9 months etc tenure of fixed deposit. Therefore, if you lock your money with 1 month fixed deposit, you will receive your return for the first month and you can withdraw the following month.

The bank will never (OR RATHER CANNOT) stop you from withdrawing money within your tenure. So, THERE IS TOTALLY NO LIQUIDITY PROBLEM WITH FIXED DEPOSIT.

Why bother so much about the return, isn't it only a bit of difference?

Do calculate from the digits I gave above and see by yourself.


TEH : It is not small ... the compounded interest effect. Be more worry of LACKING of discipline to save 10% ... start somewhere, somehow. 0.3% vs 3% .... definitely it is NOT small in long-run. What is you could find an instrument giving 6% or even 12% p.a? That requires knowledge and understanding of the instruments, the risk involved.

Yeah ... I wanted to comment on his post (last month) but forgotten. Also, I wanted to write in greater details on how&why many do not understand personal finances ... I was ONE of them, obviously. It is still fresh for me ... merely some 5-8yrs ago!!

We all need to take control of our personal finances. We need to learn to understand how all those money-related to our lives work.

Got another 'new' post by him and will want to reply that too.

Have a nice Sunday.


1 comment:

paperpapier said...

Can't agree more on this, FD is something we need to utilise as part of an important money saving tools. Layman will understand better the interest yielded in FD as generated in this website Ringgit Plus.