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Make your fixed deposit account work for you

Find out what the bank charges are before you hand over your money. Photo/File
Find out what the bank charges are before you hand over your money. Photo/File  

Saving your money in a fixed deposit bank account is one of the easiest ways to grow and keep the money safe.

With this account, you are assured that your initial investment is safe and it provides you with a guaranteed return.

Fixed deposits are similar to savings accounts, except that you cannot access your money for an agreed fixed period like one, three, six months or one year and the longer the money stays in this account, the higher the interest earned.

However, different banks have different requirements when it comes to the amount required to open a fixed account and the amount of interest the deposit attracts.

For instance, in one of the local banks, to open a fixed deposit account, one requires a minimum of Sh100,000 which would attract 11 per cent interest for a three-month period and 10 per cent for a one-year period.

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However, the interest is also subject to a 15 per cent withholding tax and is calculated on a per annum basis.

This means saving Sh100,000 in such an account for one year at 10 per cent interest per annum would earn one about Sh10,000 but after deduction of 15 per cent withholding tax, the money earned comes to Sh8,500.

Short term deposits attract slightly higher return over a short period since banks are unwilling to commit to higher returns over a long period due to changing market forces.

The story sounds quite similar across all other banks with slight variations.

According to Patrick Kingi, a banker based in Nairobi, banks offer different rates on fixed accounts and it is prudent for a customer wishing to save money to compare and contrast offerings by different banks if they want the best deal.

A survey by BDLife shows that fixed deposit interest rates range from 7 per cent to 13 per cent depending on the amount and period.

Interest rates

According to Kingi, you need to decide on how long you want to invest your money and then compare offers from different banks.

One financial institution, for example, may offer you 10 per cent on a one-year investment, where another may offer you 11 per cent for that same term.

According to a personal finance advisor, Waceke Nduati, one should make comparisons based on the amount one would wants to invest since most financial institutions will tier their interest rates based on the amount deposited.

Ms Nduati says other key issues to find out before choosing a fixed deposit account are the “monthly maintenance fees, ledger fees, taxation on your earnings, fees to open the account or fees to close the account before maturity” - this is just in case you have an emergency and need to access your funds sooner than expected.”

“Some financial institutions will charge you a percentage of the investment or a set cancellation fee.”

Keeping your money in a fixed deposit account may not be the best in terms of returns but it is a secure way for those who want to maximise the growth potential of their savings, without taking any risks.

Other investment options like the securities market can be unpredictable and may not attract investors who are risk averse.

One major plus for the fixed deposit is that it can be pledged as security for a loan in most banks.

Some local banks, in fact, assure access to personal loans and overdrafts equivalent up to 80 per cent of the balance in the fixed deposit account.

Another key secret about the fixed deposit accounts is that the higher the amount deposited the higher the returns but then one should weigh the wisdom behind locking your money for a long time for a pre-determined interest.

Generally, one can operate a fixed deposit account for a period ranging from 7 days up to 3 years.

Interest is payable on maturity and the minimum deposit amount varies from bank to bank but on average most banks require Sh50,000 and above.

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