How to achieve your savings goal faster

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When it comes to saving money, there are a few banking tools most depositors are familiar with — most savers own at least one savings account, and some may have  even opened a money market account, according to http://www.businessinsider.com.

However, another great savings account many people don’t know much about is the fixed deposit account.

If you are currently searching for new ways to grow your money, a fixed deposit may get you to your savings goals faster. But before opening an account,  learn more about the lesser-known features of this type of account.

What is a fixed deposit?

A fixed deposit is a type of product offered by banks and credit unions that serves a  similar function as a savings account. It allows you to deposit money in with a financial  institution and  earn interest.

The difference, however,  between a fixed deposit and  traditional savings account  is that fixed deposits require you to leave your  money in the account —  untouched — for a  predetermined amount of time.

Fixed deposit rates are usually fixed for the entire term, which means the  interest rate offered when you open the account remains the same until the account  matures. Account terms can last anywhere from 30 days to  five years or more, depending  on the financial institution’s options. Generally, the longer the fixed deposit term, the higher the interest rate.

It is important to know that banks and credit unions want to ensure you don’t touch  your deposit until the fixed deposit matures; so withdrawing money early will  almost always result in a significant penalty.

In order to open a fixed deposit, you usually have to contribute a minimum opening  deposit. Pay close attention to minimum deposit amounts  since banks sometimes provide higher interest rates for  bigger deposits.

Things you might not know about fixed deposit

Now that you know a few basics of fixed deposit accounts, here are some  aspects of these accounts that make them unique. It is important to keep these in  mind as you decide whether a fixed deposit is right for you.

There are several types of fixed deposits: There are  numerous ways to invest in fixed deposits. You can place your money in a traditional  account, which allows you to deposit a fixed amount of money for a specific term and  receive a predetermined  interest rate.

A bump-up fixed deposit allows you to take advantage of a higher interest rate  midway through your fixed deposit term. These fixed deposit typically comes with a  lower starting rate.

Liquid fixed deposits allow customers to withdraw funds without incurring a penalty,  but may require that you  maintain a minimum balance to acquire that privilege.

Callable fixed deposits allow banks to take back the interest rate  they originally offered and provide a lower one instead.  Typically, these accounts pay higher starting interest as a reward for taking on the risk  of having your fixed deposit called back.

CDs can automatically renew: Many financial institutions  will automatically roll your fixed deposit into a new  account when it matures if  you don’t advise otherwise. A fixed deposit rollover can be a good thing, but not in  every case.

If you don’t need access to your money and interest rates have remained the same (or have gone up), an automatic renewal of your fixed deposit is convenient and allows you  to keep earning interest without visiting the bank to open a new account. However,  if you do need that money, or  interest rates have dropped at that particular bank,  allowing your fixed deposit to roll over means you are stuck with a long-term  deposit at a lower rate until the account matures again.

You will find out whether or not your fixed deposit account automatically renews  when you open it, as well as the grace period for letting your bank know whether or not  you actually want the funds  to roll over.

It’s possible to invest in long-term CDs without losing  liquidity: A fixed deposit laddering is an investment strategy used by individuals  who are interested in acquiring several long-term fixed deposits (one to five  years) but want to avoid losing access to all their money for several years.

Laddering involves spreading your money across fixed deposits at various terms (six-month, one-year, 18-month, two-year, etc.) so that you  can always have funds  available every six months to one year, while still earning  higher interest rates on  longer-term accounts.

You can invest in fixed deposits within your retirement account: As with  many types of interest, the interest earned on fixed deposit is taxable as income.

Banks often market fixed deposits that are slightly different than traditional fixed deposits. They don’t require you to roll funds.  Instead, you can simply open  an account, fund the account with a personal bank account  and begin earning interest as you would a traditional fixed deposit.

Sometimes, banks will offer more attractive rates for fixed deposits and require no  minimum deposits to lure in customers. But in most cases, they offer the same terms,  penalties, etc. as the  traditional fixed deposit.

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