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Jan 03 2013

How to define the best bank deposit

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Deposit rate

Very often, people have two difficult questions. The first question is: Where’s money? The second of these is the question: What to do with money?

If you have some savings, and you don’t want just to ensure their safety, but also increasing, you will look for a way how to do it in the best way. One of the main ways of increasing savings is a bank deposit. This article include tips how to choose the best personal bank deposit.

Let’s define what is the bank deposit.

A bank deposit is a certain amount of money which you provide for using to the bank for a specified period, and the bank pays you for that interest.

At first glance, choosing of the best deposit is quite simple, but in reality it is not. You have to be familiar with the basic terms of bank deposits in order to choose the best for you.

The main terms of the deposit to be addressed are the following:

1. Term of deposit.

There are time deposits and call deposits:

  • Time (fixed) deposit bank will return to you after a certain period of time. Often time deposits are made for a period one month, three months, 6 months, 9 months, 1 year, these deposits are called short-term deposits. If the deposit is made for more than one year, it is a long-term deposit.
  • Call (demand) deposit bank returns at any time on request.

When you signed contract of term deposit you must check the possibility of his early return. In most cases, the bank have to return a term deposit for a reasoned request of the client even before the expiration of his term, but in this case, bank can apply different sanctions (most often it is interest rate reduction).

2. Rate of interest on deposits.

Interest on deposit (deposit rate) – is the amount of money that the bank pays the client for using the deposit. Most banks set an annual interest rate. The amount of interest on deposits is calculated by the formula:

The amount of interest on deposit = deposit amount x (annual rate deposit : 365) x number of days of using deposit

For example, if you put $ 10,000 in the bank with a cash deposit rate of 8% per annum for a period of 6 months (181 days), the amount of interest will be:

10,000 x (0.08: 365) x 181 = 396.71 dollars.

3. Method of Interest.

There are two methods of interest calculation – simple and capitalized.

In simple method of interest calculating is calculated on a formula 1 for each calendar period (usually one month) and paid to the client.

In capitalized interest method interest is also calculated by the formula 1, but the amount of interest is added to the deposit amount. As a result, in the next month interest calculated on the deposit amount and interest of the previous month.

Let’s go back to the previous example, but let’s calculate interest with capitalized method.

Month

Deposit amount

Interest

1 (31 days)

10 000,00

10 000,00 х (0,08 : 365) х 31 = 67,95

2 (28 days)

10 067,95

10 067,95 х (0,08 : 365) х 28 = 61,79

3 (31 days)

10 129,74

68,83

4 (30 days)

10 198,57

67,06

5 (31 days)

10 265,63

69,75

6 (30 days)

10 335,38

67,96

Total:

403,34

Thus, by simple method client will receive revenue 396.71 dollars, while by capitalized method client will receive 403.34 dollars.

As we can see from the examples the capitalized method is more advantageous. This method can be selected if you do not require monthly payments of additional income.

It should be noted, that the cash deposit rates in the selected bank should be not very different from the others banks. Banking sphere quite competitive, so interest rates in different banks do not differ very much. If a bank offers interest is much higher than the other you must be careful. This may indicate that such bank has deficient liquidity and it trying to raise additional funds in any way.

4. Ability to replenish the deposit.

Quite often the client makes a deposit in a bank, but after some time it wants to increase the amount by providing additional funds. When you choosing a deposit program, please check existence of such possibility. In addition, banks often determine the minimum amount, which you can add to your deposit.

5. Bank deposit guarantees.

There are special state funds which guarantee the return of deposits in many countries. Most of banks are members of such institutions. If the bank can not return the deposit it does fund. It should be noted, that the amount of deposit, which fund guaranties is limited, so it is better to make deposits whose size does not exceed the guarantee amount.

Pay your attention for bank cooperation with the guarantee funds.

Also it is important to pay attention to the reputation, experience and the size of the bank. While recently even large banks can bankrupt, but still probability of big bank bankruptcy is lower than the probability of small bank bankruptcy.

Well, here you little learned about the deposits. I hope this will help you choose the best deposit program.

1 comment
  1. Gerald Kiks

    Bank deposit rates are very low now, but deposit has other benefits for its owner.

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