Deposits are one of those financial terms that you’re sure to hear a lot. In short, a deposit is a transaction or investment that involves the transfer of funds to another party. You can withdraw this deposit within a specific time with certain conditions. A deposit is one of the popular investment instruments because it has many advantages over the usual type of savings. The benefits of deposits are that they have relatively higher interest rates than ordinary savings accounts and lower risk than other investment instruments and stocks. However, before you start investing and saving deposits, you need to understand deposits’ types, advantages, and disadvantages.
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Definition of Deposit
In financial terms, a time deposit is a deposit of funds within a certain period agreed between the customer and the bank. Deposits can also mean security deposits or certain guarantees in the delivery of goods. Although the purpose is to keep funds in the bank, time deposits and savings are different types of savings.
When you have made a fund transfer, you can use the funds for anything such as withdrawing the funds, transferring the funds to someone else, or using the money. You need a new account and money into it before you start.
You can only withdraw deposits within specific terms and conditions, and deposits have higher interest rates than ordinary savings. But if you withdraw funds without the agreed timeframe, the bank usually imposes a penalty. Deposits usually have minimum funds to qualify for. Investors choose deposits as investment instruments because they have low risk and also have a guarantee.
Difference between Deposit and Savings
Before discussing deposits further, you need to know some differences between deposits and savings. The first difference is that the interest you will get from deposits is more significant than savings. So, if you aim to earn interest in saving money, you better deposit your money.
Usually, you will only get interested in savings of about one percent. Meanwhile, deposits can provide interest up to seven percent. You will also not pay any administration fee when making a deposit. But, you need to pay tax income each year. Another difference is in the time of withdrawal of funds. You can withdraw the funds at any time, but the time deposit has a certain period to withdraw the funds if you don’t want to get a penalty.
For that, you need to pay attention to this because it goes back to the original goal of saving money. The type is also different. Deposits are an investment instrument, while savings are just ordinary funds, and investments have a certain period to take. The last difference is the passbook. If you’re saving, you will get a passbook and an ATM card. On deposit, you will get a slip as proof of the owner of the funds.
Types of Deposits
This is the most common type than the other types. This type is a term saving whose funds can be withdrawn within a certain period. Time deposits can be in the name of individuals or institutions. This type requires you to save money for a certain period and can be withdrawn according to the slip.
Certificate of deposit
This species does not have the name of an individual or institution so it is easy to move and trade. You will only get a document billet/security when you have this type. In fundraising, you can perform this type of search in advance, monthly, or at maturity.
Deposit on call
Deposit on call is the type that has the shortest tenor, which is a minimum of seven days to less than one month. However, the money you need to deposit is also quite large, usually ranging from fifty thousand SGD to one thousand SGD depending on the provisions of each bank. The amount of interest you will get if you invest depends on the negotiations between the customer and the bank.
The advantages of deposits include:
- Guaranteed money security
If you are afraid to invest and save because of safety, the deposit is the right choice. The security of your money is guaranteed because you have an account at a bank. When you have deposited your money in a bank, the bank will ensure security.
- Little risk
Deposits are investment instruments that have little risk. If you use the money for business capital or other investment, it will undoubtedly have a different amount of risk. But with deposits, the risk is very small or not at all.
- Flowers are big enough
The interest you will get when you make a deposit is quite significant compared to ordinary savings types. The bank will determine the interest rate per quarter or year, depending on the deposit term.
Disadvantage of Deposit
- Less profit
Even though you have earned a significant interest, the benefits of deposits are still small than other investment instruments assets. The profit you will get is not proportional to the funds you give.
- Depends on inflation
The value of money you deposit is affected by the Cantillon effect also known as inflation which will cause the currency to decrease in value. Inflation causes the value of money when you will not be the same value when you withdraw.
- Tax costs
Deposits are included in income tax which makes you obliged to pay tax every year. The cost of this tax is relatively high, namely 20 percent, so it is enough to cut the proceeds from deposits because the profits are small and the taxes are pretty significant.
Thus the explanation of deposits starts from understanding the difference with savings, types, advantages, and disadvantages. Before making a deposit, make sure of the reputation of the bank you choose and the period. Also, make sure the interest rate you get is the highest at 7.5%.
In addition to deposits, you can also invest using the Accounting System from HashMicro, which makes managing cash flows, adjusting entries, and more automatic and easy. Schedule a free demo to implement this system and get the right solution for your business and investment.