[AldonSseulJap] Basics of Financial Management, Exploring Savings and Time Deposits

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What comes to mind first when you think of financial management?

If you are a beginner in financial management, you probably think most of all about savings and installment savings.

They are the most familiar and preferred because the principal is guaranteed.

Personally, I see financial management as a 3-step process: ① saving, ② accumulating, and ③ growing.

Among these, the most challenging yet rewarding stage seems to be 'accumulating.'

In this 'accumulating' process, many consider savings and installment savings.

So, what is the difference between savings and installment savings, and which products offered by commercial banks provide even slightly higher interest rates? Let's find out.

What is the difference between savings and installment savings?

Savings literally means depositing money.

It refers to entrusting assets to a financial institution for a certain period, but unlike installment savings, it means depositing a lump sum at once, not paying a fixed amount monthly.

On the other hand, installment savings means depositing a fixed amount regularly over a certain period. The characters mean accumulating money, so it implies building up money.

In other words, you can choose savings or installment savings depending on your purpose.

If your goal is to build a lump sum, choose 'installment savings.'

If you want to grow a lump sum, 'savings' is suitable.

Why savings are more advantageous than installment savings at the same interest rate

For example, let's assume you have a seed money of 12 million KRW.

If you deposit 12 million KRW in a savings account with an annual interest rate of 3% for one year, after one year, you will receive the principal of 12 million KRW plus pre-tax interest of 360,000 KRW. After deducting interest tax (15.4%, 55,440 KRW), the total amount will be 12,304,560 KRW.

On the other hand, if you deposit 1 million KRW monthly into an installment savings account with an annual interest rate of 3% for one year, after one year, you will receive the principal of 12 million KRW plus pre-tax interest of 195,000 KRW. After deducting interest tax (15.4%, 30,030 KRW), the total amount will be 12,164,970 KRW.

Why does this difference occur?

Savings pay interest on the total amount deposited at the time of subscription for one year, so even if the interest rate is lower than installment savings, the actual amount returned is higher.

In contrast, installment savings accumulate monthly deposits, so the first deposit earns interest for 12 months, the second for 11 months, and so on.

The amount deposited in the last month earns interest for only one month, so although the nominal interest rate may be high, the actual amount received is inevitably lower.

Does this mean savings are always better than installment savings?

As I explained earlier about the difference between savings and installment savings, I want to emphasize choosing according to your purpose.

If you need to keep a lump sum for a certain period, choose 'savings.'

If your goal is to save steadily while controlling spending and accumulate a lump sum, 'installment savings' is recommended.

Especially for office workers who have just started their careers, joining installment savings to accumulate seed money for investment is a valuable experience.

How to find products that offer even 0.1% higher interest rates

Whether savings or installment savings,

you would want products that offer even slightly higher interest rates, right?

There is a website where you can compare the interest rates of products sold by commercial financial institutions at a glance.

It is the Financial Supervisory Service's 'Financial Consumer Information Portal FINe'.

You can use the 'One-Stop Financial Products' section there.

Among fixed deposits offered by commercial banks, NongHyup Bank's 'NH Hometown Love Donation Savings' offers the highest interest.

This product offers a pre-tax interest rate of 3% and an after-tax interest rate of 2.54%, with simple interest applied.

If you deposit 10 million KRW for 12 months, you will receive a total after-tax interest of 255,000 KRW.

What about installment savings?

If you deposit 1 million KRW monthly (fixed installment) for one year, the product with the highest after-tax interest is Gwangju Bank's 'Travel Sketch_Namdo Tour Installment Savings.'

This product offers a pre-tax interest rate of 2.80% and an after-tax interest rate of 2.37%.

After one year, excluding the principal, you will receive 154,050 KRW (after tax) in interest.

What to be cautious about with savings and installment savings?

Do not be complacent just because the principal is guaranteed.

According to the 'Depositor Protection Act', the balance including interest is guaranteed only up to 50 million KRW.

The Depositor Protection Act is a system where even if a financial company goes bankrupt, the government or a government-designated trustee guarantees payment on behalf of the financial company.

Currently, the maximum guarantee is 50 million KRW, but bills to raise the depositor protection limit to 100 million KRW are continuously being proposed in the National Assembly.

The background is that compared to 2001, when the Depositor Protection Act guaranteeing up to 50 million KRW was established, the current GDP per capita is 2.9 times higher (as of the end of 2023), and the deposit scale has increased 5.3 times.

However, the Financial Services Commission takes a cautious stance.

They point out that as of the end of last year, 98% of depositors in the financial sector hold deposits of 50 million KRW or less, so raising the limit might benefit only those with large financial assets.

Also, raising the limit could cause funds to flow more into savings banks or secondary financial institutions with higher interest rates, potentially increasing financial instability, which is another reason for caution.

Besides the Depositor Protection Act, there is another cautionary point.

It is best to withdraw savings or installment savings on the maturity date.

The interest rate you were informed of at the time of subscription applies only until maturity.

From the next day, a very low interest rate of about 0.1~0.3% is applied, so it is recommended to apply for automatic termination or automatic reinvestment services from the start.