GET PERSONAL WITH FINANCE A guide to thinking about financial independence in your 20s

Personal Finance in your 20s are a complete rollercoaster. One minute you are 19 and fresh out of school, never having heard the word ‘personal finance’ and suddenly you are somewhere in your 20s, torn between living your best life and experiencing the anxieties of saving for your future and that very, very distant retirement. Add all the uncertainties brought forward by the global pandemic into the mix, most of us in our 20s are now seriously discussing our personal finance and financial goals with one big question – where do I start?  

In this mini-series, we talk to financial experts and non-experts on the art of managing personal finance; how to save, how to spend and where to invest.

PUTTING YOUR MONEY TO WORK: FIXED DEPOSITS

You’ve saved up – congratulations! That’s the hard part. The fun part is putting those savings to work. When you are young and you don’t have too many expenses, it’s important to think ahead and grow your savings to meet your long-term goals. Why not let the money idling in your account make more money for you?  In the upcoming segments, we look into different ways of growing your wealth and how to go about it. 

 For this week’s segment, we talk to Chinthaka Kudaligama, a banker by profession with over three decades of experience in the banking and finance sector. Chinthaka’s 30-year career working in and managing bank branches islandwide lends him the experience and expertise to talk to us about investing and growing our savings through fixed deposits. 

Fixed deposits (FD’s) are, without a doubt, the most popular investment instrument of choice and one of the safest in terms of risks and liability. Chinthaka guides us through the basics of FDs and its role as an investment tool.

Fixed Deposits

Fixed Deposits or Term Deposits are deposits accepted by a bank from customers for a fixed period of time.  In return, the bank offers a fixed interest rate for each fixed deposit and the interest will be paid monthly or at maturity or even at a frequency determined by the customer. 

Example: You deposit Rs. 100,000 for a period of 12 months at an assumed interest of 6% per annum at maturity or monthly of 5.75% per annum. Your return for the fixed deposit would depend on whether you draw interest on a monthly basis or you wish it to be paid at maturity. The monthly interest would be slightly lesser than the interest paid at maturity; meaning – if the interest earned at maturity would be Rs. 6000 (calculated at 6%), the interest earned monthly would be Rs.  5750 (calculated at 5.75% apportioned equally among twelve months).  After 12 months and the period of time for the deposit has elapsed, you will now have your initial investment of Rs. 100,000 and the additional interest income. 

When selecting an FD  

The idea of opening a fixed deposit is to have the maximum return so the key factor would be to consider the interest rate. Since rate of interest on fixed deposits are fixed until maturity, having an idea about the market conditions and the fluctuations in market rates is an added advantage.  Due to the fixed term nature of the fixed deposit, you should also be mindful about the stability of the bank or financial institute you are opening the deposit at. 

Benefits of an FD to grow your savings

Rate on FDs cannot be changed during the agreed period, so you will enjoy the same rate even if the market rates decline. 

It also doesn’t tie up your savings entirely while you try to grow it. Most banks have the option of allowing you to put your FD as a collateral and obtain a term loan or an overdraft facility against it in an emergency. This will allow you not to withdraw the fixed deposit prematurely as that is subject to a penalty. 

Investing a lump sum in a FD vs. Investing small sums in multiple FDs 

It really depends on you and what you need your money for. If you have Rs. 1,100,000 ready to invest but you know you would only have a requirement of Rs. 100,000 in a couple of months and the remaining 1 million is not needed any time soon – the best idea would be to split the sum. You can invest Rs. 100,000 for a short period and Rs. 1,000,000 for a longer period. If you try to invest the entire amount in one fixed deposit for a long period, in an emergency, you will have to withdraw the entire amount prematurely and be subject to a penalty or obtain a loan. 

Short term FDs vs. Long Term FDs 

When you are selecting a time period for an FD it’s important that you have an idea about the economic and market conditions in the country. Since the rate of interest is static until maturity; if you invest for a shorter period and the rate increases in the market, you could enjoy a higher return by reinvesting after maturity. If you invest for a longer period and the rates tumble, you could still enjoy the higher uninterrupted rate but at the same time, if the rate increases, you might lose out. 

When the interest rates are low

While the current interest rates on fixed deposits are low, its important to know that fluctuations of interest rates in the market is actually a very common phenomenon. The rates on deposits depend on the demand for credit in a country. In a low or volatile situation, the best thing you can do is simply observe the market and decide to invest for short periods. That way, if the rate increases you will have the ability to invest for a longer period and enjoy better return on investment. 

Fixed Deposits or Term Deposits are deposits accepted by a bank from customers for a fixed period of time.  

If you can’t invest 
large sums, consider 
your options

When you are young and just starting life and saving up for the future, you may not always have the capability of investing large sums in fixed deposits. 

Look at other investment plans where a large amount is not needed and you can start with a manageable agreed sum on a monthly basis for an agreed period of time, like 2-6 years or more. At the end of completing this period you will receive a guaranteed sum. Usually, these kind of investment plans are offered a higher rate than even fixed deposits.

Invest in a hybrid savings accounts or savings products from a bank which are a blend of short-term fixed deposits and a savings account. These accounts will give you a higher interest rate than regular savings accounts but a little less than an FD. 

This article is for informational purposes only and should not be considered as finance/investment advice.  Do independent research, talk to a financial advisor and/or seek independent advice where appropriate and necessary.