Many people with large financial reserves are wondering how to invest this money. Because the traditional savings account hardly plays a role today, day money and fixed-term deposits offer themselves as two basic alternatives of investment. If you want to maintain liquidity and value to have access to the money at any time, you should opt for a savings account – with relatively low interest rates. If you can forego the availability of high sums of money for a long time, however , the time deposit is the more lucrative alternative. As a rule of thumb, the more money is left over, the sooner one should choose a fixed-term deposit.
|aspect||call money||fixed deposit|
|yield||rather low||comparatively high|
|flexibility||big (individual savings can be made)||low (fixed amount for long term)|
|minimum deposit||mostly not necessary (or very low)||high (usually only from 1000 Euro)|
|liquidity||high (even large amounts are available at any time)||low (termination usually only for goodwill)|
The amount of the fixed interest depends on this
Of course, the starting point for the level of interest on fixed-term deposits is always the general development of interest rates. In times of high interest rates, fixed-term deposits are particularly attractive, but fixed-term deposits also tend to come up with slightly higher interest rates even in periods of low interest rates. Why is this? Fixed term is characterized by the fact that a certain amount in the long run is left to the bank. This gives the financial institution some security and the ability to work with the money invested by the client. For this, higher interest rates are offered than for overnight money accounts, because for them the bank always runs the risk of the customer withdrawing higher amounts. Crucial for the amount of interest on the deposit is therefore above all the term .
The level of interest on fixed deposits is essentially (as with all interest rates) based on the ECB’s key interest rate . Attractive fixed interest rates for short maturities are only available for very high investment amounts (from 10,000 euros).
- The longer the term , the better the fixed rate
- If a premature termination is contractually possible, this usually has a negative effect on the fixed interest rate
- New customer bonuses often provide increased interest rates for a limited period of time
It’s not just interest rates that matter
If you want to invest your money not only safely, but also profitably, you should pay attention to other conditions in addition to interest on fixed-term deposits. While the interest rate usually provides a good guide when comparing offers, other factors can affect in detail:
- New customer bonuses (usually only for a limited period, for example the first year)
- How are the interest paid ?
- Annually on a savings account ? In this case, the compounding effect is lower
- Only at the end of the term ? The interest rates are then not immediately available, but they increase the compounding effect
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Interest payment: Compound interest and withholding tax
The compound interest effect is an important factor that many customers only notice at second glance. As the name implies, this effect refers to the fact that over time interest also accrues on the amounts already earned through interest. The longer the term of a fixed-term contract, the more the interest-rate effect will be. However, it is only made possible by the interest remaining on the time deposit account. If, on the other hand, the interest is paid annually – for example, on a money market account – the effect is less. For overnight money accounts generally have lower interest rates. The interest rate is therefore not the only decisive factor for the return . The payment terms for the interest also play a major role in the fixed deposit.
The fixed-term tax is also levied by the state on a flat-rate withholding tax, which is collected directly from the bank. It amounts to 25 percent of the interest earned on investments. With an exemption order can be prevented that the tax is paid directly from the bank to the Treasury, as long as the income does not exceed 801 euros for singles and 1,602 euros for married people. If you have failed to issue an exemption request, you can claim the tax deducted in your tax return as an income tax prepayment.
Fixed-term deposits are especially interesting for people who rely less on high and uncertain profits than on security . The decisive factor is essentially the term of the individual fixed-term contract. Long maturities can be profitable – but only in low interest rates if interest rates do not change. Short deposit terms leave the option open to respond to interest rate changes, but they only provide manageable yield prospects that are barely above the yield of a call money account. However, those who have high reserves and invest part of their assets in fixed deposits usually do not go wrong. In general, of course, in the interests of diversification, the entire assets should not be invested in time deposits. You can spread the risk of investing through various forms of investment such as stocks, funds, time deposits and commodities such as gold. In addition, you will achieve a balance between riskier assets such as stocks that provide sufficient return and secure assets such as time deposits, which prevent a total loss of the capital saved.
Select the correct runtime
The amount of the fixed interest depends mainly on the term . The longer the financial means available to the financial institution, the more likely are the return prospects for the bank. Because the bank works with the money and invest it profitably. Different terms for fixed deposits depend on the interests of the investor:
|running time||Advantages and disadvantages|
|6 months to 1 year||
|1 to 2 years||
|3 to 5 years||
|Up to 10 years||
For some time, the development of interest rates has only one direction: down. And as long as the key interest rate of the European Central Bank is close to zero percent (0.05% at the beginning of 2015), there will not be much change in interest rates on fixed deposits. Experts expect an upturn in the key rate only when there are signs in the euro area stable economic development. Only then will the ECB probably see scope for a slow departure from the “cheap money” policy. In the medium term, interest rates will probably not change significantly for fixed-term deposits and will continue to range in the range of one to three percent. However, should the ECB cut interest rates even further, interest rates on fixed-term deposits would also suffer – although financial experts are currently speculating about this measure.
How safe is time deposit?
Stock Market Crash and Euro Crisis – Many investors are wondering how safe their investments are with the bank. Fixed deposits and government securities generally enjoy a reputation for guaranteeing solid interest income, though earnings expectations are not particularly high here. The risk is low. The EU-wide safeguarding of savings up to 100,000 euros also applies to time deposit accounts. This regulation has been in force in the European Union since 2011 and applies to each customer and bank. Additional protection (beyond the state-guaranteed 100,000 euro limit) is provided by the Deposit Guarantee Fund of the Bundesverband deutscher Banken e. V., to which, for example, Deutsche Bank, Commerzbank and Postbank are affiliated. This protects up to 1.5 million euros per investor.
Interest losses due to prepayment penalty
A fixed-term account is created permanently – this is the specific feature of the fixed-term deposit. Therefore, the customer usually has no right to terminate the contract early to get the money already paid. However, banks usually show themselves to be accommodating – but they usually demand a prepayment penalty for the lost opportunity to use the money profitably. This amount is often higher than the interest income achieved so far, so early termination can be associated with a financial loss for the client.
The prepayment penalty is often paid in the form of lower interest rates or the complete discontinuation of interest. If the bank does not agree to an early termination, it often offers a loan secured with the time deposit account. The limited termination opportunities are another argument for using term deposits only for sums of money that are unlikely to be dependent in the foreseeable future.