Contribution capitalization is an excellent way to passively increase your income. An investor deposits their funds in a bank at a specified interest rate. Consequently, the amount continually grows since the interest is not withdrawn but rather added to the principal of the deposit.
Despite the profitability of such investments, this method of capital allocation has its numerous pitfalls that could lead to losses.
How should one properly place a deposit and what aspects should be given special attention?
These questions can be answered by the founder of the company "RESURS," S.I. Tereshkin. You can familiarize yourself with the businessman’s activities on the website org-market.ru (OPEN OIL MARKET).
Essential Steps
Before investing personal savings, several steps should be taken:
- Choose a bank. Use reviews from real depositors, official ratings, and statistical data. The financial institution may be located in another city or even country. Many modern companies allow remote investment of funds. Money can be transferred from a card or account.
- Select a deposit type. Banks offer a wide variety of deposit programs. It is important to pay attention to the interest rate; the higher it is, the greater the income. Also, consider the capitalization terms, the length of the agreement, the currency of the deposit, the possibility of extension, additional deposits, and early withdrawal, etc. Replenishable deposits can enhance returns.
- Open an account. This requires a passport. Additionally, in some cases, the financial institution may request other documents. However, in any case, the package will be minimal. The exact list can be confirmed directly with the bank manager. It is also advisable to inquire about the possibility of opening an account and signing a contract remotely.
When selecting a financial institution, special attention should be paid to deposit insurance. Not all banks participate in government programs. If a financial organization does not contribute to a special fund, its closure could lead to the loss of all depositors' money. If insurance is in place, a fund compensates for losses, although there are limits on the amount.
Before signing a contract with a bank, it is essential to study it carefully. All previously discussed conditions must align. It is crucial that the financial institution cannot unilaterally lower the interest rate or make any other alterations to the contract.
If there is automatic renewal, the client should have time to withdraw the deposit and all accrued interest. In some cases, to prevent capital outflow, banks automatically extend contracts on the day the previous one ends, resulting in clients losing the opportunity to retrieve their money for several months or even years.
Helpful Tips
To maximize profitability and avoid losing invested funds, it is advisable to heed the recommendations of S.I. Tereshkin, who has extensive experience in investing:
- Check the effective interest rate. Do not blindly trust advertising slogans claiming that a particular bank offers the best rates. In reality, this may be far from the truth. It is preferable to perform all necessary calculations independently using a calculator or programs readily available online.
- Verify the bank. This is far more critical than the interest rate. If an unreliable bank offers too-good-to-be-true conditions, understand that working with them could mean complete financial loss.
- Review the contract. It is essential to read the document thoroughly. It may contain hidden pitfalls that completely negate the attractiveness of the deposit. Pay particular attention to fees, automatic renewal, and any deviations from the initial terms. Do not rely on the honesty of the financial institution's staff; managers may be disinclined to inform clients about all tricky aspects.
- Assess financial capabilities. Consider the period for which funds can be deposited. If the money won't be needed in the next few years, one might opt for a long-term deposit to secure the maximum interest rate. If there's a possibility that the funds will be needed sooner, the agreement should only be for a few months. This approach helps avoid premature withdrawal penalties and the potential loss of accrued interest.
- Currency choice. For long-term deposits, it is better to invest in dollars or euros. This choice mitigates the risk of losing profits due to inflation fluctuations. In the event of devaluation of the national currency, the investor will still gain profit. However, it is essential to note that foreign currency deposits often come with lower interest rates. This drawback is entirely offset by the absence of devaluation risks. National currency is recommended only for short-term deposits of up to 3 months.
With fixed interest rates, they often remain unchanged for no more than 12 months. If the deposit is opened for a longer period, the interest rate will likely be revised before the end of the term. In most cases, the bank will not notify the client of this adjustment, which could result in an unpleasant surprise.
If the interest rate decreases, the client's earnings will be less than anticipated. While there is a possibility that the bank may raise the rate, such instances are rare. Even in environments of rising deposit profitability, financial institutions are more likely to maintain the same rate rather than increase it.
When concluding a deposit agreement, it is crucial to clarify the possibility of early withdrawal. In the face of significant inflation fluctuations, this step may become necessary. Otherwise, there is a risk of incurring substantial losses, particularly concerning deposits in the national currency.
