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Fixed Deposit Accounts Explained Using Practical Examples

Updated 3 months ago

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Fixed Deposits explained
Article Summary

Fixed deposit accounts offer a lucrative opportunity to invest money for a fixed period, earning higher interest rates compared to standard savings accounts. Illustrated through the example of Wasiu, who locks in a sum of money for six months to pay his rent, the article highlights key aspects of fixed deposits:

  • Fixed deposit accounts involve locking in a sum of money for a predetermined period, typically ranging from 180 days to one year.
  • The minimum investment amount usually starts at 100,000 naira, with no maximum limit.
  • Interest rates vary between banks, so it’s crucial to inquire about prevailing rates before investing.
  • While fixed deposits provide higher interest rates, withdrawing funds before maturity may incur penalties, potentially resulting in the loss of earned interest.
  • Anyone can invest in fixed deposits, but it’s essential to understand that once the money is locked in, it remains inaccessible until maturity.

Table of Contents

So, we’ve gotten a lot of questions asking us about fixed deposit accounts. Let’s delve into what fixed deposit accounts are and how they can benefit you.

Fixed deposit accounts are simply investments where you lock in a sum of money for a predetermined period. Let us break it down for you with a practical example:

Meet Wasiu. Wasiu has one million naira sitting idle in his account, and he wants to make the most of it. Currently, the average interest rate on savings accounts in Nigeria is around 5% per annum, but at 8.5%, Fixed Deposits offer a slightly higher average.

Please note that the above-stated rates differ from bank to bank, so you must contact your bank for current rates. You can also compare rates between different banks before deciding which to go with.

Wasiu has plans to pay his rent in the next six months. He doesn’t want his money lying idle; he wants it to work for him.

So, Wasiu approaches his bank and inquires about investing his money for 180 days, roughly six months. The bank provides him with the prevailing interest rate for this duration. Once Wasiu agrees to the terms, the money is debited from his account and locked in for the specified period.

After six months, Wasiu receives his initial sum along with the agreed-upon interest. But what do you need to know before jumping into fixed deposits?

What you need to know

Firstly, the minimum amount for fixed deposits typically starts at ₦100,000 (Naira | NGN), with no maximum limit. You can invest as much as you want, from thousands to billions.

Secondly, the duration of fixed deposits varies. Most commonly, they range from 180 days to one year, depending on the bank’s policies and your preferences. Just so you know, this duration is called “Tenor”.

Thirdly, the interest rates for fixed deposits differ from bank to bank. It’s essential to visit your bank and inquire about the prevailing rates before making any decisions.

But what if you need your money urgently? In case of emergencies, you can request to liquidate your fixed deposit, but it comes at a cost. You may lose a portion or all of your interest, depending on how long the money has been locked in.

Now, who can invest in fixed deposits? Well, anyone can! Unlike regular savings accounts where you can withdraw money anytime, fixed deposits are meant to be fixed for the agreed-upon period. This means once you lock in your money, it stays put until maturity, earning interest along the way.

Conclusion

In conclusion, fixed deposit accounts offer a secure way to invest your money for a fixed period, earning higher interest rates compared to regular savings accounts. So, if you’re looking to make your money work for you, fixed deposits might be the way to go. Remember to research and compare different banks’ offerings before making your investment.

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