One of the most common investment methods among individuals is the cumulative bank deposit. It may seem straightforward—just deposit your money, right? However, even such a simple investment approach has its nuances, the ignorance of which can lead to reduced profit. Additionally, many depositors have little understanding of capitalization and how to utilize it effectively.
What does this concept entail, and what pitfalls should one be aware of when investing funds in this way?
To navigate these questions, we turn to Sergey Tereshkin, the founder of Oil Resource Group, who has extensive experience in capital growth. More information about the entrepreneur can be found on his personal website at www.sergeytereshkin.ru.
Types of Cumulative Deposits
Financial institutions typically offer clients several types of deposits:
- Interest is accrued on a separate account, from which it can be withdrawn if necessary. Meanwhile, the principal amount of the deposit remains unchanged and continues to generate interest until the end of the contractual term.
- Interest on the deposit is credited to the main account and thus adds to the principal amount of the deposit. As a result, the total amount increases monthly, which in turn grows the income.
The addition of interest to the principal amount of the deposit is referred to as its capitalization. This system is also commonly known as compound interest. For long-term investments, this method proves to be far more advantageous than a standard deposit where the depositor can withdraw interest monthly.
While the first type of deposit is straightforward, Tereshkin recommends examining the capitalized deposit option in greater detail.
Advantages
Deposits with capitalization offer numerous advantages compared to standard deposits:
- The depositor's savings grow much faster. Throughout the deposit term, the amount continuously increases. The longer the contract duration, the more money the client ultimately receives.
- The interest accrual system is sufficiently simple and easy to understand. One can independently calculate the future income using a calculator or specific online tools.
- Long-term deposits always yield returns, even amid inflation fluctuations. This way, one can make money work and generate a good income for the owner.
There are special online calculators, applications, and other programs available for calculating future profits. To obtain data, it is enough to input the key figures: deposit amount, interest rate, and duration of the deposit. Just seconds later, the system will provide an exact result.
Potential Pitfalls
Like any other investment, deposits come with their own potential pitfalls that are best understood in advance. It is important to recognize that exceeding the refinancing rate will incur tax liabilities for the individual, specifically concerning personal income tax (PIT).
For instance, if the deposit interest rate exceeds the refinancing rate by 5%, the individual will owe a 35% tax on the difference.
Moreover, it is crucial to thoroughly review the agreement before signing it. The contract outlines the rights and responsibilities of the parties, the deposit term, interest rate, and other parameters. Special attention should be given to the clause regarding capitalization, which may occur daily, weekly, monthly, biannually, etc. In most cases, interest is credited once a month. However, one can occasionally find more favorable conditions, such as daily interest accrual. But this is more of an exception than a rule. Daily accrual facilitates rapid capital growth, leading domestic banks to often avoid such schemes.
Even those that operate using this system may seek to make it as beneficial as possible for themselves. To achieve this, financial institutions intentionally lower the deposit interest rate. As a result, monthly capitalization may prove to be significantly more advantageous. To avoid financial losses, it is essential to carefully scrutinize all available offers in the market.
Furthermore, one should not rush to deposit funds in the bank offering the most attractive conditions. It is necessary to thoroughly investigate the financial institution. This can be achieved by visiting specialized forums and websites online.
Additionally, it is advisable to review annual bank ratings, focusing specifically on financial performance. Loss-making institutions should be dismissed immediately. A deposit should only be arranged with a stable bank.
Trust your money only to organizations that have stood the test of time. It is best to avoid deposits in dubious banks, as this could result in the loss of all funds. In this scenario, the ideal choice is a government financial institution. Such banks may offer deposits with slightly lower interest rates compared to commercial ones, yet they are not at risk of bankruptcy. The state supports these financial institutions, helping them remain solvent.
Ideally, the deposit amount should not exceed what a special fund would compensate in the event of the financial institution's bankruptcy. It is wiser to open several smaller deposits rather than one large one, as this minimizes risks.
Regarding the currency of the deposit, it is prudent to favor dollars or euros. Even amidst significant inflation fluctuations and the devaluation of the ruble, the depositor will remain profitable. Not only will they receive income in the form of accrued interest, but the amount will also be substantially higher when converted back into national currency.
Deposits can be opened not only in one's city but also far beyond its borders. A number of modern organizations offer the option for non-residents to open deposits. There is even no need to travel to another location. Funds can be transferred to a special account from one’s card. The contract can be signed electronically or sent through any postal service. This is quite convenient and allows for significant time savings, as well as substantial capital growth. The primary concern is to avoid falling victim to fraud.
