Explain the terms of a fixed deposit and check whether it is covered by deposit insurance.
Whenever you have money in a fixed deposit, you should know five things about it: which bank holds it, what rate it earns, how long the term is, what the bank will do when the term ends, and whether the money is insured. Farah found out why these matter when she asked her aunt a simple question.
Her aunt has used fixed deposits for thirty years. Farah wanted to know what rate one of them was earning, and her aunt couldn't say. The money had gone in years earlier at a good rate, and since then the bank had kept rolling it over. When the two of them logged in, the deposit was still there, renewing every twelve months. It was earning far less than the same bank was offering new customers. No mistake had been made anywhere. Nobody had told the bank to do anything different.
Of all the products in this course, the fixed deposit is the simplest. Because it is so simple, people stop paying attention to it.
A fixed deposit is money you lend to a bank or finance company for a set term, with the interest rate fixed on the day you place it. The term might be one month, six months, a year or longer. You agree to leave the money alone until the term is over. The bank agrees to pay the stated rate for the full term.
The shape is the same as a bond: a face value, a rate and an end date. Lesson 1.1, "A bond is a loan with a fixed timetable: a face value, a rate and an end date", sets out the bond version. A fixed deposit differs from a bond in two ways. You can't sell a fixed deposit to anyone else, and the borrower is a bank instead of a government or a company.
A bank will pay more for money it can count on keeping for a fixed term. How money works, lesson 1.2, "How a bank earns the interest it pays you", explains the reasons.
Take S$40,000 placed for 12 months at 3.0% a year (example figures). When the term ends, the bank returns the S$40,000 and adds S$1,200 of interest.
Banks usually quote fixed deposit rates as a yearly figure, even for terms under a year. Money lent for part of a year earns only that part of the yearly rate. To find the interest on a short deposit, multiply the quoted yearly rate by the fraction of the year the money is lent: one half for six months, one quarter for three months. If you put the same S$40,000 in for six months at the same yearly rate, you receive S$600, which is half of a full year's interest. A three-month deposit quoted at 3% pays roughly a quarter of 3%. When people compare short deposits, the mistake they make most often is reading the yearly rate as the amount the short deposit will actually pay.
You also need to know when the interest is paid. On most terms of a year or less, all the interest comes as one payment at maturity. On longer terms the bank may pay part of it during the term. The terms for each product state how its interest is paid, so read them before you fill in the payment table in Lesson 1.4.
When the term ends, the bank acts on your maturity instruction, which you normally choose when you place the deposit. You have three choices:
the principal and the interest are paid into your account the principal is renewed and the interest is paid out the principal and the interest are both renewed
If there is no instruction, many banks renew the deposit automatically, for the same term, at whatever rate they pay for that term on the day. Often that is the board rate, the bank's ordinary rate for the term, instead of a promotional rate. Board rates can be far lower than promotional rates, as Lesson 5.2 describes, and you only see the difference if someone checks.
This is what had happened to Farah's aunt. Her deposit had been renewing automatically at the board rate. If that rate were 0.5% (a made-up figure), her S$40,000 would earn S$200 over the next year, compared with the S$1,200 a promotion might have paid (an invented example).
In Singapore, Singapore dollar deposits fall under the Deposit Insurance Scheme, which is run by the Singapore Deposit Insurance Corporation (SDIC). If a member bank or finance company fails, eligible deposits are repaid up to a limit for each depositor at each member. Eligible Singapore dollar fixed deposits are included, and so are savings accounts and current accounts.
The limit has changed over the years. Check the current figure and the list of members on the SDIC website each time, and don't rely on what you remember.
There are three exclusions to know. A deposit in a foreign currency has no cover, even at a member bank, so a US dollar fixed deposit sits outside the scheme. A structured deposit, whose return is linked to something like an index or an exchange rate, has no cover either. The limit also applies to all your eligible deposits at one member added together. Each account does not get its own limit.
Before you put a large sum into a fixed deposit, check four things: that the bank is a member of the scheme, that the deposit is in Singapore dollars, that it is not a structured deposit, and that your combined eligible deposits at that member stay within the limit. How money works, lesson 1.3, "What SDIC deposit insurance covers and what it does not", has the full rules.
Farah sat down with her aunt and wrote out the five basics for the deposit: the bank holding it, the rate, the term, the maturity instruction the bank had on record, and whether it was insured. It took ten minutes. At the end, an account the aunt had forgotten about had become a decision the two of them could make together.
Now do the same for one fixed deposit you hold, or one you are thinking of placing. Write down the bank, the rate, the term, the maturity instruction and whether it is insured. Then use the yearly rate and the length of the term to work out what the deposit will pay in dollars.
Pick one fixed deposit you hold or are thinking about. Write down the bank, the rate, the term, the maturity instruction and whether SDIC insures it.
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