Growing your money using a fixed deposit or notice account

With the rising cost of living, you may be looking at ways to make your money go further as we head into a new year. Besides things like cutting down on non-essentials and creating a monthly budget for your expenses, it is also important to make the money that you do have available work as hard as possible.

Let’s assume your income is more than your expenses and that you have surplus cash available. There are lots of investment options available, such as share portfolios, investing it offshore or even buying property. But if you want your money to be easily available, should you need it – while also earning better interest than leaving it in your regular bank account – a fixed deposit or notice deposit account can be a good option. 

What is the difference between a fixed deposit and notice account?

While a fixed deposit account and notice deposit account are both near-cash investments – that is, they’re investment vehicles that can be converted relatively easily into cash – there are differences between the two:

• With a fixed deposit account, the intention is to leave your money in the account for a predetermined period, whether that is six, nine, 12 or 24 months (depending on the bank’s product offering). You then choose how you get paid your interest, whether it is monthly or at maturity.

• With a notice deposit account, you have more flexibility with how long you invest your funds for and when you want to access your money. These accounts are so named because you need to give a notice period for when you want to withdraw your funds – e.g. 32 days (depending on the bank’s product offering).

For both account types, if you want to withdraw your funds before the investment period is up or that is shorter than your agreed upon notice period, you will have to pay early withdrawal penalties. 

Which account is better?

Fixed deposit accounts offer you better interest rates than notice deposit accounts, especially over a longer investment horizon. You also benefit from a fixed interest rate for the entire investment period, which means you are safeguarded should bank interest rates decrease. The opposite is also true here, in that you might miss out on higher rates if rates increase.

However, as mentioned above, a notice deposit account gives you more flexibility in terms of when you want your money, and you’ll also pay lower early withdrawal penalties than with a fixed deposit account (if the withdrawal amounts are the same and the remaining term of the fixed deposit is longer than the remaining notice period of the notice deposit account).

Partial withdrawals are usually possible with a notice deposit account but not with a fixed deposit. So, if you think you may need some of your funds at a certain period in future, you may be better served to go with a notice deposit account.

What are annual versus monthly rates?

Your monthly rate is the nominal annual interest rate that is calculated and then compounded monthly. For example, let’s say you want to hold your investment for a year and your rate of return is 12%. You would then earn 1/12 x 12% = 1% per month on your investment.

Things get a bit more complex if you decide to reinvest the interest you are earning each month. Using the example above, if you reinvest your monthly interest, you would earn 1/12 x 12% on the original capital plus the interest you have already earned. This is known as compound interest (or interest on interest), where you capitalise the interest so that the balance that earns the next portion of interest is higher. In other words, you are now earning interest on a higher amount than you originally invested. Ultimately, your return will be higher if you reinvest your interest than if you were to take it out each month. 

What should you consider before committing to a deposit?

Before committing to putting your money into a fixed or notice deposit account, think about these three things:

1. Your investment horizon. If you have a shorter savings goal – let us, say you want money for a holiday in three months’ time – a notice deposit account may give you a better return for that period, subject to rates on offer at the time. That said, it’s always advisable to shop around and compare various product offerings.  For a longer term goal such as saving for a deposit on a house, you’ll want to find the best return for your investment over one or even two years, which may mean that a fixed deposit would typically be a better option.

2. Your cash flow needs. What money will you need to be available now, and what portion can you put away? If you think you’re going to need cash in the short term, you may not want to tie it up into an account where you have to give notice to get your funds out – or to pay a penalty to get them out.

3. Tax implications. Over a certain amount, the interest you earn on your investment becomes taxable, so consult a tax professional to find out more about potential tax implications.

Overall, both fixed and  notice deposits can be good investment options if you have money lying around and don’t foresee needing it immediately. Which one you decide to go for depends on the flexibility you have, your cash flow needs, and how long you want to invest your money for. In these times, having extra cash available that is being made off money you already can help you get ahead financially – whether it is to level up your savings or settling existing debt.