In times when you need to keep cash within reach, one way to continue growing your money is to park it in a time deposit.
- With all the economic uncertainty due to the pandemic, people need to keep cash available.
- Time deposits don’t offer much by way of growth potential compared to other kinds of investments, but they have higher interest rates compared to regular savings.
- Besides being relatively low risk, time deposits are covered by the Philippine Deposit Insurance Corporation (PDIC).
- You can rebuild your emergency fund by opening and renewing time deposits.
It’s been almost half a year since the outbreak of COVID-19 in the Philippines and as everyone continues to adjust, there are still many things up in the air. The general financial advice for people is to have cash on hand. For the average person, liquidity – having cash easily within reach – is the name of the game.
Pandemic or not, you need cash on hand to purchase your essentials, pay your bills as well as your premiums if you have health protection. This is a critical time to develop good financial habits. Among these skills is to set aside money for emergencies in an emergency fund. Whether you’re just starting to build one or replenishing it, having ample cash in reserve should be your first priority.
At least 6 months’ worth of your expenses is a good level of cash in reserve to keep on hand for your emergency fund. However, having money idly sit in a savings or checking account isn’t ideal while building or replenishing your cash reserves. There is still an opportunity to grow your money – time deposits.
Time deposit basics
Banks offer investments called time deposits which let you park your cash for an amount of time called your term. At the end of the term, you get your money back with interest.
In general, the interest you get for your time deposit depends on two things: the amount of money you put in called your principal, and the length of the term. The larger the amount and the longer the term, the higher the interest.
You can open a time deposit online using Metrobank Online with interest rates that can reach up to 1.25% interest per year, depending on your principal, and term length. Metrobank also offers time deposits in foreign currencies, but these are only available at branches, as of writing. (Learn more: Metrobank deposit rates and fees)
Time deposits and your emergency fund
Among investments, time deposits are the most straightforward and contain relatively low amounts of risk. However, do not expect your money to grow by a large margin. The drawback of the low level of risk is the low potential for growth. However, what they do offer is easy access to your money.
Unlike stocks, time deposits do not fluctuate in value which means you don’t have to worry about pulling out your money at a loss.
Unlike bonds, time deposits have comparatively short terms and low minimum investments. You can open a time deposit with PHP 10,000 for a term as short as one month. While PHP 10,000 is hardly enough for an emergency fund, you can still grow it as you continue to build/rebuild your emergency fund.
Let’s say you open a PHP10,000 1-month time deposit at 1.25% interest on Metrobank Online. That will earn you around PHP 10 per month which doesn’t seem like much but if you keep renewing your time deposit, possibly even adding more money as you continue to save, it can grow even more thanks to compound interest. Having it in a time deposit also helps you prevent unnecessary spending because you can’t withdraw it from an ATM. This is very important when you’re trying to rebuild your emergency fund.
You can also withdraw your money from your time deposit by pre-terminating before the end of the term but you only get a fraction of the interest you were supposed to get and you also have to pay a documentary stamps tax.
Note that pre-termination still involves the usual 20% withholding tax for peso time deposits and a 15% withholding tax for foreign currency time deposits.
Because of these features of a time deposit, while they are more accessible compared to most investments, you shouldn’t keep your entire emergency fund in one. This is because while you can withdraw in an emergency by pre-terminating it, it’s another step to go through that might take a day to process. Maybe more if you pre-terminate on a weekend.
A time deposit can help you build up towards an emergency fund but once you have your emergency fund, keep it in a savings account so you can mobilize your money in an instant if you need to.
Time deposit protection
Time deposits are not absolutely risk-free. In any kind of investment, there will always be risk. With time deposits, the risk is if the bank you have a time deposit with runs out of cash. However, the likelihood of this happening is very rare these days because of strict regulations that require banks to always have a ratio of all the money deposited with them in reserves.
Even when a bank is closed by the Monetary Board of the Bangko Sentral ng Pilipinas (BSP), all deposits, including the time deposits, are covered by the Philippine Deposit Insurance Corporation (PDIC) under the Department of Finance. The PDIC covers up to PHP 500,000 per depositor per bank. If your deposit is larger than that, you can file a case against the bank at the Liquidation Court.
A strategy to rebuild your emergency fund
If you’re rebuilding your emergency fund, you can try this time deposit strategy:
- Take all the cash you have and earmark everything you need to pay for your essentials, your bills, your premiums, your debts, for one month.
- If you have enough money left over to survive another month, then keep that money in savings. If not, save up and start again from Step 1.
- When you’ve earmarked everything you need to spend on and can survive an extra month, put the rest of your cash in a one-month time deposit.
- When the time deposit matures, repeat steps 1 and 2 and set aside what’s left.
- Open a new one-month time deposit using the money from the previous and add more based on what you can set aside.
Note that this is only one possible strategy designed to maximize flexibility over everything else. This is not designed with growth in mind. As with most personal finance, whether you apply a strategy or how you modify it depends on your personal circ*mstances.
For instance, if you have extra income from a side hustle, you can choose to put all your earnings from this exclusively into a time deposit to help speed things up. If you have dependents, having a one-month buffer might not be enough.
There are many factors involved in deciding how you’re going to go about it. However, the facts remain, everyone needs an emergency fund and taking advantage of the flexibility and relative safety of time deposits is one way of going about it.
Learn more about time deposits and other ways to invest and make the most of your hard-earned money at https://metrobank.com.ph/save/time-deposit
This article is part of a collection of stories and practical financial tips that are published to help people learn from the experiences of others, and to pick out lessons on personal finance and sound money habits beyond the pandemic
