Since money stored in a bank is guaranteed by the state, deposits are considered the safest and easiest way to increase your funds. What does the interest on a deposit depend on, how exactly is it calculated, what are the pros and cons of different types of deposits and how to earn compound interest, explained Monika Maaring, head of the everyday banking department for private clients at Coop Pank. Interest rates on all deposits are calculated on an annual basis. This plays an important role, first of all, in calculating the profitability of deposits with a shorter period. If you put the same amount at the same interest rate on a 6-month or 12-month deposit, the money on the short deposit will earn interest in half the time, and therefore, even at exactly the same interest rate, the account will receive half as much income. The interest income from two consecutive 6-month fixed deposits will be the same as from one annual deposit. However, it is important to consider two nuances here. First, the interest rates offered on time deposits of different durations tend to vary. Secondly, interest rates are constantly changing – if last year we saw that every couple of months it was possible to get a higher income on deposits, now the trend is the opposite. Behind this change is the European Central Bank, which is adjusting its base interest rates, which in turn is reflected in the price lists of local banks. The European Central Bank has already lowered its base rate slightly, and this trend is expected to continue. This is why it is still worth opening deposits now, but it must be taken into account that banks currently offer higher interest rates on short-term deposits compared to long-term ones. It is expected that in a year the rates will be lower than today's level, that is, the money stored in the bank will begin to earn less. To decide what duration of term deposit to choose, you should study the interest rates offered by banks and take into account your personal needs. The most effective way to deposit is the so-called cascade method, when deposits of smaller sizes and different durations are opened. For example, 2000 euros can be placed in four parts – for 3, 6, 9 and 12 months, 500 euros in each deposit. This way, some portion of the money will always be available faster and interest income will continue to flow. This division is also supported by the fact that you do not need to pay anything to open a deposit and there are no administrative costs. By investing 2,000 euros for different periods over a whole year, the investor can, for example, earn two free tickets to the Vanemuine summer theater or an annual ticket for an adult to the Tallinn Zoo. Taking into account everyday expenses, this method of deposit is definitely more profitable than keeping money in a regular checking account. You can set your deposit to automatically renew. For example, using the cascade method, you do not have to constantly monitor the expiration date of deposits and renew them manually – renewal can be automated. In addition, fixed deposits have two types of payment schedules – all interest income can be received at the end of the period along with the deposit or interest can be received monthly. In the latter case, the interest is 0.05% lower, but it becomes possible to immediately use the earned income or reinvest it without waiting for the end of the deposit period. When making deposits, you also need to take into account that income tax is automatically deducted from the interest earned, information about which is transmitted to the Tax Department. As a result, the investor does not need to do anything extra, and the interest earned is included in his annual income. The most popular way to save money is through a fixed deposit as it has the highest interest rate, which currently reaches 3.75% per annum. The disadvantage of a time deposit is that the money is placed for several months or even years, and it is not profitable to use it earlier, since in this case the depositor will lose all income. A good and safe opportunity to save money is a savings deposit, which has much more flexible conditions. A savings deposit is similar in nature to a current account, with the difference that the money in it is kept separately, and day-to-day transactions and card transactions are not made from the savings account. Unlike a current account, a savings deposit generates interest income, which is usually about 2% per annum and is paid on the same deposit monthly. This means that the interest income accrued for the month begins to bring interest to the investor in the next month – this effect is called compound interest, when the income already earned immediately begins to bring in additional money. For example, Coop Pank clients can use a savings deposit called Rahasahtel, where it is reasonable to transfer reserve funds that are not needed immediately. It is worth having such a reserve fund in case, for example, the washing machine breaks down or to pay for the costs of a multi-part trip. Unlike a fixed deposit, a savings deposit allows you to continuously add and withdraw money with a day's notice. If the minimum deposit amount for a term deposit is 100 euros, then smaller amounts can be added to the savings deposit. Thus, a savings deposit is the most flexible and simple way to increase money, while a fixed-term deposit requires longer planning but offers a higher interest rate. It is important to ensure that the money is kept in a safe credit institution, where deposits are protected by the government Guarantee Fund up to €100,000 per person. These credit institutions include the nine banks operating in Estonia, but not savings and credit cooperatives. Although savings and credit cooperatives offer higher interest rates, they are also associated with significantly higher risk since the funds invested in them are not protected by the Guaranty Fund. If something happens to a particular savings and loan cooperative or a depositor's money, there will be very little hope of getting your hard-earned savings back. Therefore, when opening deposits, you should give preference to banks operating in Estonia, where money is reliably protected by the state. It doesn’t matter whether the money is placed in a current account, a time deposit or a savings deposit – they are all guaranteed by the state. If there is a need to invest large sums – for example, after selling real estate or receiving an inheritance – and there is a desire to use the protection of the Guarantee Fund, it is worth opening deposits in several different banks, since state protection in the amount of up to 100,000 euros is valid in each bank separately. In this way, anyone can safely place several hundred thousand euros, spreading them over deposits of up to 100,000 euros in different Estonian banks. Based on Estonian capital, Coop Pank is one of five universal banks operating in the country. The bank has 194,100 clients who carry out daily banking transactions. Coop Pank leverages the synergy between retail and banking, making everyday banking more convenient and accessible to people. The strategic owner of the bank is the domestic retail chain Coop Eesti, which includes 320 stores. Read RusDelfi wherever it is convenient for you. Follow us on Facebook, Telegram, Instagram and even TikTok.
