Deciding which bank product to keep our savings could be a daunting task. We're told that securities, through mutual funds, provide the highest return, although this is also coupled with the highest risk, as illustrated in the most recent stock/financial crisis (2008). Ordinary deposits, on the other hand, provide a very limited yield.

 

Let's assume that you've choosen time deposit (TD) because it's relatively safe as compared to mutual funds, with a higher yield than ordinary deposits. You're presented with two options: a 60-day time deposit with an interest of 4.5% per annum, or a 30-day time deposit at 3% every year.

Let's say you plan to "forget" an amount of (P200,000) for 10 years after being deposited. The money will be automatically rolled over. Which has a higher yield? The 4.5% interest appears very tempting, as it is higher than the 3%.

 

To arrive at the amount after each cycle, we multiply the principal with the interest rate, then add the "income" to the principal in computing for the next cycle. This is because the account is automatically rolled over.

The 60-day time deposit, with an interest of 4.5%, yields approximately P250,000. In other words, your P200,000 earned a mere P50,000 after 10 years. A newly-minted Pinoy Entrepreneur could easily raise this amount in less than a year.

The 30-day TD at 3% gives you roughly 269,000. An income of P69,000 after 10 years is definitely unacceptable when compared to the potential income of a successful business, but this is not the question presented at the beginning of this article.

The question, again, is this: Which has a higher yield, a 60-day time deposit with an interest of 4.5% per annum, or a 30-day time deposit at 3% every year? The rough computation above shows that the 30-day TD, even if it has a lower interest rate, gives the higher yield.