What is a fixed deposit? The first step toward wise asset management

Do you ever feel like your paycheck comes in, but your bank account always feels short? This is a common concern among many workers and those interested in personal finance. Although we’re in a low-interest-rate era, having a systematic savings strategy can still grow your assets. Especially if you want to manage a lump sum safely and efficiently, a fixed deposit might be the right choice. In this article, we’ll explore the concept of fixed deposits and how to use them step by step.

The Key to Managing a Large Sum: The Real Difference Between Fixed Deposits and Installment Savings

A fixed deposit is a financial product where you deposit a certain amount of money for a fixed period and receive the agreed interest at maturity. It’s a way of lending money to the bank and earning interest in return. While you can’t withdraw the funds midway without penalties, you can generally expect higher returns. Maturities typically range from 1 month to 5 years, with interest rates varying depending on the bank and term.

In contrast, installment savings involve regularly depositing a fixed amount each month to receive the principal and interest at the end. Fixed deposits require a lump sum deposit, making them more suitable for those who have saved a large amount, while installment savings are better for students or beginners who want to start saving with small amounts. They’re also effective for building a savings habit.

Some savings accounts allow withdrawals at any time. These are mainly used for everyday transactions like salary transfers, credit card payments, and utility bills. They offer high liquidity but usually provide very low interest income.

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The Charm of Fixed Deposits: Not Just About Interest Rates, But Also Security

Why Do Fixed Deposits Offer Higher Returns?

A fixed deposit is based on the promise that the depositor will not withdraw funds during the term. This stability allows banks to lend or invest the money securely over the long term, sharing part of the profit with depositors through higher interest rates. Conversely, savings accounts that allow withdrawals at any time involve more uncertainty for the bank’s fund management, resulting in lower interest rates.

Legal Protection for Peace of Mind

According to South Korea’s Deposit Insurance Act, up to 50 million won per person—including principal and interest—is protected. Even if the bank fails, funds in fixed deposits are guaranteed by the Korea Deposit Insurance Corporation, making them safe. Legislation is set to be amended in December 2024 to raise this limit to 100 million won by 2025. This legal protection makes fixed deposits a more trustworthy option.

Unlike stocks or funds, fixed deposits are unaffected by market fluctuations. Since their value doesn’t fluctuate wildly, they are ideal for conservative investors who prioritize principal safety.

Tailored Strategies by Situation: Maximize Returns with Fixed Deposits

Short-term vs. Long-term: Choosing Based on Investment Duration

The strategy for fixed deposits varies depending on the investment period. For short-term investors, choosing products with a 6-month to 1-year maturity can provide safety and relatively high interest. During rising interest rate periods, short-term products are especially advantageous.

Long-term investors are recommended to opt for maturities of over 3 years. The power of compound interest accumulates over time, rapidly increasing assets. Fixed deposits are ideal for medium-term goals like wedding funds or home purchases. However, early withdrawal can significantly reduce returns, so it’s best to use funds that are not needed in the short term.

Current Interest Rates and Priority Conditions

As of the first half of 2025, the average interest rate for 1-year fixed deposits is around 2-3% annually, and for 3-year deposits, about 2.5-3.5%. You can compare rates across banks in real-time via the Korea Federation of Banks Consumer Portal. Always check before you commit.

Many banks offer preferential rates if certain conditions are met, such as salary transfers, credit card usage, or opening multiple savings products simultaneously. Carefully review your eligibility to earn an extra 0.5-1% interest.

Simple vs. Compound Interest: The Power of Time

Fixed deposits accrue interest either on a simple or compound basis. Simple interest is calculated only on the principal—e.g., 1 million won at 10% yields 100,000 won annually. Compound interest, however, adds interest to the accumulated interest, leading to exponential growth over time. For example, in the first year, you earn 10%, and in subsequent years, interest is calculated on the increased amount, making long-term growth much more substantial.

Tax Benefits

Certain groups—such as those over 65, disabled persons, independence fighters, and military personnel—may enjoy tax exemptions on fixed deposit interest. If eligible, you can grow your savings without paying taxes, making it a smarter choice.

Practical Ways to Use Fixed Deposits Effectively

The “Windmill” Strategy: Consistent Income Generation

One creative approach is the “windmill” method: deposit a fixed amount each month into a fixed deposit, then reinvest the matured amount into a new fixed deposit. This spreads out maturities, maximizes compound effects, and provides liquidity when needed.

Don’t Miss Out on High-Interest Promotional Products

Banks periodically launch special high-interest fixed deposit promotions. These often have strict conditions or limited sales periods, so staying informed and acting quickly can help you seize these opportunities, especially when interest rates are high.

Preparing for Emergencies: Using Collateral Loans

Before early withdrawal, consider taking a loan against your fixed deposit. Such collateral loans usually have lower interest rates than unsecured credit, and you can access funds without breaking the deposit, minimizing potential losses.

Conclusion

A fixed deposit isn’t just a simple savings product—it’s a smart financial tool that, if used wisely, can systematically grow your wealth. However, it’s not suitable for everyone; you should consider your financial situation, goals, and risk tolerance before choosing. By understanding the features of fixed deposits, comparing interest rates and benefits across banks, and selecting the best options, you can turn this product into a reliable means of asset accumulation.