So the other day my friends and I were having a meal while talking ‘adult’ things – work, economy, property, relationship, finances etc. (#Adulting) While in the conversation, I learnt that some of them have been keeping all their hard earned savings in … yes, you’ve guessed it, their savings account. I prod further to ask if they have considered putting into some investments or at least in fixed deposit. That was when I realized that not everyone have the clearest idea of what a fixed deposit is.
Hence, I’ve decided to write this post which will cover the following:
- What is a Fixed Deposit
- Features of a Fixed Deposit
- 3 reasons why Fixed Deposit is better than the savings account
This may be basic knowledge for some, but for others who have vague ideas of what the Fixed Deposit is and may be a bit too shy to ask others, this post is for you. #JomBelajarBersama
What is a Fixed Deposit (“FD”)
In the Malaysian context, FD is an investment-like product offered by the banks. It is an account where you will place your money to earn interest over a set period of time (a.k.a. tenor). Customers will have the flexibility to determine the tenor for their FD placement, of which the banks would already have pre-set rates for varying tenors.
FD vs Savings Account
The difference between an FD and your savings account is the fact that once you have made your FD placement, you agree to keep your money there until the end of the tenor. Hence the name “fixed” deposit. It is fixated in that account and shouldn’t be withdrawn. In contrast, your money in your savings account is free and flexible for you to withdraw anytime.
Here’s an example of the FD rates offered by our biggest local bank (Maybank):
As you may have realized, the longer the tenor, the higher the interest rates. Because the tenor and the rates have been given upfront, it is easy to calculate the interest you will earn from your FD.
Example of FD Interest Calculation
Ah Chong decides to make his first FD placement in Maybank. Here are the details as below:
Amount: RM5,000-00
Tenor: 6 months
Interest Rate: 3.30% p.a. (as per Maybank table above)
Placement date: 28 Feb 2019
Maturity date: 28 Aug 2019 (6 months later)
So Ah Chong places his RM5,000 in the Maybank FD account and got a FD receipt for this placement which states all the details as above.
Upon maturity of the FD, here is how much Ah Chong will have:
28 August 2019
RM5,000 + (RM5,000 x 3.30%p.a. x 6/12 months)
= RM5,000 (principal) + RM82.50 (interest earned)
= RM5,082.50
(Note: the interest rate given by banks are usually “p.a.”, which means per annum. So 3.30% is actually for 1 year. If your placement is less than 1 year, then you have to pro-rate it as I have done)
And just like that, Ah Chong without putting any effort (shake leg at home) earned himself RM82.50. He can now bring his gf out for a beanieplex movie.
“Oh wow that’s cool, but Munhong…you mentioned this was an investment-like product right, got any risks or not?”
Dangers and Risks of the Malicious and Nasty FD
If there was a range of investment products arranged by their risk involved, it would look something like this:
That’s right! FDs technically have NO RISK at all!
You may think, “eh Munhong, where got. Still got risk what! What if the bank goes bankrupt?”
Ah no sir, there’s PIDM coverage of RM250k per person per account, per member bank (well unless you placed your FD in a non-member bank, to which I will ask, why lah bro).
Placement Amount
The next concern to address is the amount required for placement. Many young adults often think they don’t have enough money to be placed in FDs.
What if I told you that the minimum placement is only RM500?! Here’s UOB Bank offering 3.0% p.a. for 2 months tenor with only RM500 placement.
Of course if you’d like to get much higher rates, the Malaysian banks often give out promotion rates as high as 4.35% p.a. for 12 months tenor with minimum placement of RM10,000.
Once you’ve accumulated enough savings, do go for these promo rates. With close to no risk involved, 4.35% yield p.a. is a good place to start your investing path.
So to summarize on the placement amount:
- Minimum placement – RM500-00 (only)
- Minimum for promotion rates placement – RM10,000-00
3 Reasons Why FD > Savings Account
I subscribe to the idea of making your money work for you. Hence, here are 3 reasons why I think we should all keep our savings in FDs instead of savings account.
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Better interest rates.
This point here can be the sole reason why FDs > savings account. Here are the comparison of interest earned for the 2 accounts (I’m using UOB’s rates for comparison sake):
| Interest Rate | Principal | Interest Earned | |
| Savings Account | 0.25% | RM 10,000 | RM 25 |
| FD | 3.25% | RM 10,000 | RM 325 |
The difference here is RM300 (!) and if your principal placement is more, that 3% is a big difference.
We should also note that inflation rate for Malaysia ranges around 3% every year. What that means is, because of inflation, our purchasing power for the same amount of money is reduced by 3%. Inflation causes the price of goods to increase, thus reducing our purchasing power.
For instance, the value of RM100 today will only be able to purchase items worth up to RM97 by next year because of the 3% inflation. Inflation is the reason why our nasi lemak which was priced at RM1 years back is now RM2.00 – RM3.00.
Therefore, not only is FD rates higher than your pathetic savings accounts’, it also helps to neutralize the inflation effect.
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Makes us more discipline with our savings.
By placing our hard earned savings in FDs, we are indirectly making our funds a bit more protected from our irresponsible splurging.
The savings account provides a tad bit too much flexibility for us to freely withdraw our savings to splurge on unnecessary things. Admit it! What happened to that pair of Adidas Yeezy Boost that you didn’t need but thought was cool to have?
In contrast, by placing it in FDs, not only do you need to force withdraw it from the account (1st hurdle), you will also need to forego the interest you could have earned (2nd hurdle). This will definitely make you think twice before splurging irresponsibly. You’re welcome.
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Allows segregation of funds for different purposes.
Another benefit of the FDs is that your placement can be put into separate FD receipts. Therefore, you can segregate your savings for different purposes.
For instance, you can place your ‘dream home’ fund of RM5,000 into one FD receipt and your ‘wedding’ fund of RM3,000 into another FD receipt.
This is like putting your money in different compartments in your wallet. It’s all still in one FD account (your wallet) but separated into different FD receipts (the compartments). I know many of us like to keep money in the ‘kocek kocek’ of your wallet. Here a bit, there a bit right? Or is it just me…
Conclusion
I truly believe in taking full control of our finances so that it won’t take control of us. If you have not made any FD placements before, go ahead and visit any of the banks to get started. Some even allow online FD account opening (I think Maybank allows their existing customers to do so) so it’s really quite convenient these days.
On a side note, if you have not calculated your personal net worth or your cash flow, feel free to check my previous posts out. I made a free downloadable template for you to kick start those calculations, so do check that out.
Well, I hope this post has helped to clarify all about the FD. Feel free to drop a comment below if this was useful or if I may have left out anything important about the FD.
