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Which might be a better choice?

Starting Money : 10K

(1) Fixed Deposit Account with the following interest rates

1 month : 0.5%

2 month : 0.6%

3 month : 0.7%

...

10 month : 1.4%

11 month : 1.5%

12 month : 1.6%

NOTE: flexible to withdraw at anytime

(2)Saving Account with following interest rate

0.8% per annum

NOTE: will top up 1K/month and let's assume that will not widthdraw.

My Questions:

1) Saving money on which account might be a better choice?

2) Pro and Cons

3) Average Total Interest earned for each account after 1 year

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How is it a "fixed deposit account" if the money can be withdrawn at any time? 1.4% > 0.8%, so why would one not go for the higher interest rate if there are no drawbacks? –  Michael Kjörling Dec 6 '12 at 10:12
    
imm.. they say so.. can withdraw at anytime. –  kitokid Dec 6 '12 at 10:19
1  
"can withdraw at any time" does not mean "without penalty". Surely there must be some kind of tradeoff, or there would be little point in offering the choice. That piece of information would likely make the question answerable, but also quite probably too localized. –  Michael Kjörling Dec 6 '12 at 10:21
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1 Answer 1

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Your decision about which of these investments to make is going to depend on how long you expect to leave the money in the account. For example, based on the figures you give us, if you think you are going to want to withdraw the money in three months or less then you should chose the savings account. For ten months or more you should choose the Fixed Deposit. (As Michael Kjorling says, "flexible to withdraw at any time" does not mean you won't pay penalties for withdrawing early that's why you shouldn't choose the longer term deposits if you want to withdraw earlier).

That's the simplest approach. The trouble of course is that you don't necessarily know how long you are going to leave the money in. If you are saving for a house, and you know you won't want to buy in the next year, the 12 month deposit looks good. But what if your car suddenly needs repairs? You would have to withdraw that money early and pay the penalties, and it turns out you would have been better of putting it in the savings account.

A good approach is:

  1. Decide how long you are likely to want to leave the money invested, and put it in the place that gives the best interest rate for that time period
  2. Make sure you have enough money in no-penalty easy-to-withdraw accounts to cover any emergencies you might have in that time
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