Optimizing a Time Deposit Investment

Optimizing a Time Deposit Investment. In this post, we'll tackle how you can invest in Time Deposits without loosing liquidity and avoid locking in your money to low interest rates.
In my previous post, I mentioned that Time Deposits are one of the safest investments we can make. You are guaranteed that you will not lose your money, and you are also guaranteed a profit upfront (the interest rate offered).

And having our money locked in is usually a good thing, since we won't be able to spend it impulsively. In this case, "forced savings" is our friend.

But what if higher interest rates became available next week? Or conversely, what if we took too long to decide, and interest rates fell while we were deciding? And regardless of interest rates, what if an emergency occurred and we needed access to some of our savings?

In this case we can practice Laddering. Laddering is the practice of investing in fixed income securities (like Time Deposits) with different maturity dates. Basically, instead of investing everything all in one account, we spread our investment.

So how does it work? If we had Php 100,000, typically we would look for the time deposit which will give us the highest interest rate. For example, it could be 1-year at 2.375%

If we practice laddering, we could have something like

20,000 in a 1-year 2.375% account
20,000 in a 9-month 2.375% account
20,000 in a 6-months 2.375% account
20,000 in a 3-months 2.25% account
20,000 in a 1-month 2.125% account

And when the 1-month time deposit matures, we deposit it in a 1-year time deposit account with the highest interest rate.

But what is the advantage of doing so?

First, we are guarding against the risk of a fluctuating interest rate. If interest rates go down, we have already invested in the older, higher rates. But if interest rates go up, part of our money will mature early and can be used to take advantage of them.

Second, this also frees up our money, making it more "liquid" or accessible as needed. For example, what if an emergency happens, and I need to get 5,000 from my savings? If the time deposit hasn't matured yet, I would have to redeem my money and forgo the potential interest (Php2,375) and incur a penalty (it depends, but let's say Php100).

I would lose about 2,475 just because I needed 5,000 of my own money for an emergency.
And since there is no way we can predict when an emergency will happen (especially not one year ahead), it would be imprudent to place all our savings in a long-term time deposit.

However, placing them in a savings account will yield a significantly lower return. But with Laddering, we can take advantage of a time deposits' higher interest rates without locking up our money for too long.

Hopefully this post has helped you plan how to more effectively take advantage of time deposits. For more helpful tips, please subscribe to my feed, like me on Facebook, circle me on Google+, or follow me Twitter @thePFApprentice. It's free, you won't miss new articles, and you'll also get my free ebook: the Super Savings Guide.

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This is part of a  series on bank products:

photo credit: personalfinanceapprentice.com


  1. Hi. I was able to find your blog through your comment on mine. This is a great blog. Good luck in your investment endeavors.

  2. Hi,
    After maturing each investment we will put it all in 1 year?

    1. Yes, unless you need it (after all, liquidity is one of the upsides of this strategy).

      After each time deposit matures, we reinvest it in a 1-year TD with the highest interest we can find.