Meaning of Fixed Deposit and Wise Asset Management: A Practical Guide for Investors

Concerns about money not accumulating in your bank account, and many people wondering how to grow their assets in a low-interest-rate era. In such situations, a noteworthy financial product is the fixed-term deposit. By understanding and utilizing the concept of fixed-term deposits correctly, you can manage a lump sum safely and efficiently. In this article, let’s explore what fixed-term deposits are, who they are suitable for, and how to use them smartly.

What is a Fixed-Term Deposit: Understanding the Basics Accurately

What is a Fixed-Term Deposit

The meaning of a fixed-term deposit is simple. You deposit a certain amount of money into a bank for a predetermined period and receive the agreed interest upon maturity. It’s a product where you provide funds to the bank and earn interest in return. An important feature is that you cannot withdraw the funds before the maturity date. Early withdrawal may incur penalties, but in return, you can receive relatively higher interest rates.

Fixed-term deposits can be chosen for periods ranging from 1 month to 5 years, with interest rates varying depending on the period and bank. It is mainly used by investors who want to grow their lump sum safely.

Difference from Regular Savings

Regular savings accounts may look similar to fixed-term deposits but are different. Savings accounts involve depositing a fixed amount regularly each month. They are suitable for students or beginners in finance because you can start with small amounts and develop a saving habit. However, the interest earned is generally lower than that of fixed-term deposits.

Besides fixed-term savings, there are also flexible savings accounts. Flexible savings allow you to freely decide the deposit amount and timing, offering high flexibility.

Role of Savings Accounts

Savings accounts are products with free deposit and withdrawal, mainly used to store living expenses or emergency funds. You can withdraw funds anytime, offering high liquidity, but the interest rate is very low. They are suitable for managing salaries, credit card payments, utility bills, and daily transactions.

Comparison of Three Products

Why Are Fixed-Term Deposit Rates Higher: Reasons Investors Should Know

Why are fixed-term deposit interest rates much higher than savings accounts? The core reason is the stability of funds.

Fixed-term deposit customers commit not to withdraw their funds for a certain period. Banks can use these funds for long-term loans or investments with stability, and in return, they offer higher interest rates. Conversely, savings accounts can be withdrawn at any time, limiting the bank’s fund management options, which results in lower interest rates.

Principal Guarantee and Stability: Strengths of Fixed-Term Deposits

According to South Korea’s Deposit Insurance Act, up to 50 million won per person is protected for principal and interest. Even if the bank goes bankrupt, the Korea Deposit Insurance Corporation will pay out the amount, providing peace of mind. With the legal revision scheduled for December 2024, the coverage limit will be increased to 100 million won next year.

Unlike stocks or funds, fixed-term deposits are not affected by market fluctuations. Therefore, there is no risk of sudden asset value changes. This principal protection feature is very attractive to conservative investors seeking stable returns.

Which Investors Are Suitable for Fixed-Term Deposits

Short-term Investors’ Strategy

Short-term investors can utilize fixed-term deposits for periods of about 6 months to 1 year. They can maximize short-term gains while earning relatively high interest. Especially during periods of rising interest rates, short-term fixed deposits become an effective strategy.

Long-term Investors’ Choice

Long-term investors choosing maturities of over 3 years can benefit from compound interest to continuously grow their returns. Fixed-term deposits are ideal for those saving for long-term goals like marriage funds or home purchases.

Be aware that early withdrawal may incur penalties. It’s important to plan your funds in advance and select the maturity date aligned with your financial goals.

5 Ways to Choose the Right Fixed-Term Deposit for You

Step 1: Importance of Comparing Interest Rates

The most important criterion when choosing a product is the interest rate. Using the ‘Deposit Product Interest Rate Comparison’ menu on the Korea Federation of Banks Consumer Portal website allows you to systematically compare fixed-term deposit rates across banks.

Step 2: Utilize Preferential Interest Rate Conditions

Most banks offer preferential rates to customers who meet certain conditions. These include salary transfers, credit card usage, or subscribing to other financial products. Finding and utilizing conditions that benefit you is a smart move.

Step 3: Carefully Decide the Deposit Period

Choose the deposit period according to your financial plan and goals. Generally, longer periods offer higher interest, but you must be prepared for penalties if you withdraw early.

Step 4: Choose Between Compound and Simple Interest

Fixed-term deposits differ based on how interest is calculated.

Simple Interest: Interest is calculated only on the principal. For example, investing 1 million won at 10% simple interest for 5 years yields 10,000 won per year, totaling 50,000 won interest.

Compound Interest: Interest is calculated on both the principal and accumulated interest. Under the same conditions, the amount grows to 1.1 million in the first year, 1.21 million in the second, and so on, with interest increasing exponentially over time.

For long-term investments, compound interest is much more advantageous. For short-term investments, the difference may not be significant.

Step 5: Check Tax Exemption Benefits

Certain groups such as those aged 65 and over, disabled persons, or independence patriots can utilize tax-exempt deposit products. This can reduce tax burdens and increase actual returns.

Fixed-Term Deposit Investment Tips: Maximize Your Earnings

The “Deposit Windmill” Strategy

The windmill strategy involves subscribing to fixed-term deposits with a fixed amount each month, then reinvesting the maturing deposits. This method aims for compound interest while dispersing maturity dates to maintain fund flexibility. It also helps maintain consistent savings motivation.

Using High-Interest Special Offer Deposits

As of March 2025, the annual interest rate for 1-year fixed deposits is around 2-3%, and for 3-year deposits around 2.5-3.5%. However, banks periodically launch high-interest products. Special offer deposits often have strict subscription conditions or short sales periods, so quickly obtaining information and applying is crucial.

Using Fixed-Term Deposit Collateral Loans

If you need quick cash, consider taking a loan against your fixed-term deposit instead of early withdrawal. Collateral loans on fixed deposits usually have lower interest rates than unsecured loans and do not incur early withdrawal fees.

Conclusion: The Start of Wise Asset Management

Understanding the meaning of fixed-term deposits and using them properly can lead to stable asset growth. However, they are not suitable for everyone. Consider your financial situation, goals, and risk tolerance comprehensively when choosing.

By clearly understanding the differences between fixed-term deposits and regular savings, as well as the effects of compound and simple interest, and comparing rates and preferential conditions via the Korea Federation of Banks Consumer Portal, you can find the most suitable product for yourself. After this preparation, utilizing fixed-term deposits will bring you closer to achieving your financial goals.