What are fixed deposits (F.D.) ?

If you’re reading this post, I’m pretty sure you’ve at least heard of the term “Fixed Deposits (F.D)” before. As mentioned in my previous post, my very first exposure to investment was F.D.

So what exactly are Fixed Deposits (F.D) ? It’s actually just like how you save your money at the bank, the main difference is that for FD, there’s a fixed period of time that you couldn’t withdraw the money, and in return you’d get a certain amount of interest. Mostly around 2.9% to 4%, depending on the bank and the ongoing promotion. Most banks also require you to have at least RM 1000 initial funding.

So, is it really just that easy to get my interest? The answers are yes and no. The downside of fixed deposits are your money will be stuck there for a set period of time and you won’t be able to withdraw any of your money before maturity, which starts from a minimum of 1 month time.

The good side of fixed deposits is obviously getting the interest without any effort.

So how do you calculate the interest rate of FD?
Let’s say the current rate of the bank is 3% for 1 month, and I’m planning to put RM1,000 for a month. Does this mean I get RM1000 * 3% = RM 30 within a month? Well, the answer is No.
You will only get RM 2.5 in return, if you’re saving RM1,000 for a month.

The calculation of fixed deposit after maturity

You might be saying that RM 2.5 is such a small amount of money, and you can definitely earn more than that in a shorter period of time. Which is why I would recommend at least save up to RM 5000 and choose a longer maturity time.

If you decide to save RM 5000 and put in the fixed deposit for 1 year, you can get RM150 in return for interest with minimal effort. (Assuming the interest is only 3%)

If you’re just starting out on this money journey, it might be a good choice to consider on fixed deposits.

The downside
Fixed Deposits may sounds like a great investment with zero effort but with the inflation rate going on around the world, it wouldn’t be a good choice to put your money in for too long.

If you save RM 1000 with interest of 3%, you’d get RM 1030 by the end of the year. During the same year if the inflation went up by 2%, a RM 1000 item would cost RM 1020. With the interest, you’d still have RM 10 extra.

However if the inflation rate was 4% for the year, a RM 1000 item would then cost RM 1040, the RM 1030 that you saved wouldn’t be enough to pay for the item.

For me, I’d normally choose to put my Fixed Deposit for 6 months. Depending on the market situation I might increase my capital and reinvest back in Fixed Deposits again or choose to invest in something else with higher return.

Of course each investment have their own risks and cons, it is important to choose what suits you best, and be alert of the current market situation!
Happy investing!

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