If you are looking for an alternative to a checking account, a savings account and certificate of deposit may prove to be a good choice. The reason is that, although they are two different products, they allow you to obtain higher interest rates and offer a good level of security. How exactly do they differ and which ones should you choose?
What is a savings account
Before talking about the differences between deposit accounts and certificates of deposit, it is necessary to understand what exactly these products are. Let’s start from the first. It is an instrument on which you can deposit your savings for a certain period, which usually does not go beyond 6 years, and receive interest on them.
There are two types of deposit accounts: there are unrestricted and restricted ones. The former, as can be seen from the name, are free so it is possible to withdraw the money set aside at any time. With others, however, the money remains blocked for a certain period in exchange for higher interest rates.
The strengths of the deposit account are:
- simplicity;
- liquidity if the unrestricted formula is chosen.
Furthermore, the money deposited on it up to 100,000 euros per depositor and per credit institution is protected by the Fitd or by the Interbank Deposit Protection Fund.
Here is an example:
Suppose that a saver has 120,000 euros deposited in three different products at the same bank. Exactly 50,000 euros in a deposit account, 30,000 euros in a current account and 20,000 euros in shares purchased through his securities portfolio. If the credit institution were to fail, the person will only receive 80,000 euros in reimbursement. He will lose the 20,000 euros deposited in shares as the Fitd will not cover investments in shares, bonds and repurchase agreements.
The main disadvantages are:
- the risk of lower rates in the future since if the latter rise, a restricted account may be less convenient than other offers;
- the stamp duty of 0.20% which is paid on the deposited amount;
- the need, in many cases, to have a linked current account;
- a certain but limited return.
What is a certificate of deposit?
The certificate of deposit is a financial instrument that allows you to deposit money for a certain period following which you receive a certificate certifying the right to obtain a refund of the amount invested and the payment of interest accrued at the agreed maturity date.
As regards the duration of the provision, it can range from a few months to several years while the interest rate applied can be fixed (i.e. it never changes during the entire duration of the constraint) or variable i.e. it adapts to market movements.
There are also various types of certificates of deposit which are distinguished from each other by the method of calculating interest, flexibility and duration.
The main ones are:
- standard deposits which have a fixed rate and duration could be the ideal product for those who want a certain and risk-free investment;
- certificates of deposit with a variable rate that changes based on market conditions could prove optimal in periods when increases are expected;
- indexed certificates that adapt to a market index such as Euribor, these products give the possibility of benefiting from a possible increase in the interest rate;
- long-term certificates which have a duration ranging from 5 to 10 years, offer a higher return but require greater capital immobilization;
- Certified deposits with a final reward which include an additional bonus are ideal for those who wish to leave their money invested in the long term.
What are the advantages and disadvantages of certificates of deposit
Just like deposit accounts, certificates of deposit are also guaranteed by the Fitd up to 100,000 euros per depositor. In addition to this advantage, such products:
- they offer a guaranteed return if you opt for the fixed rate;
- they do not require a supporting current account;
- they are simple to use because once subscribed they do not require any management;
- they are predictable as the savings target can be precisely programmed;
- they are stable as they balance a portfolio with riskier investments.
The main disadvantage is the possibility that the fixed rate becomes less convenient compared to new offers if market rates increase.
Furthermore:
- that the money will remain blocked until maturity so early withdrawal could result in the loss of interest or a penalty;
- the stamp duty of 0.20% on the average annual balance.
What is the difference between a savings account and a certificate of deposit?
The main difference between savings accounts and certificates of deposit concerns liquidity.
In fact, free deposits allow you to withdraw money immediately while certificates of deposit impose a restriction until maturity. Precisely for this reason the former are preferable for those who need quick access to capital while the latter for those who can give up liquidity for a long period in exchange for a higher rate.
The legal form is also different as the certificate of deposit is a credit security issued by the bank similar to a fixed-term investment while the account is a deposit relationship.
Another difference concerns the payment of interest. For the deposit account, this occurs periodically or upon expiry depending on the product chosen. For certificate of deposit, however, it depends on the formula envisaged at issue which can, for example, be periodic or unique at the end of the bond.
What alternatives?
As an alternative to deposit accounts and certificates of deposit, those who wish to make their capital profitable can also choose bonds and government securities. These products are not simple bank deposits but loans that investors grant to an issuing body which can be a government or a company. The returns may be higher if you opt for corporate bonds but the risk is higher, especially due to secondary market fluctuations.
Then there are mutual investment funds, ideal for those who want to diversify their portfolio. The return, however, is not guaranteed and the value of the share fluctuates over time as it follows the market trend.
