Understanding Financial Products for Novice Investors
The most common mistake made by financial novices, including myself in the past, is blindly accepting recommendations from acquaintances or financial institution staff without thoroughly verifying the products. How much do you know about deposit accounts, savings accounts, and savings-oriented insurance products?
Various financial institutions offer deposit accounts and savings accounts, and even though they share the same name, their benefits and features can differ significantly. Therefore, it's crucial for everyone to carefully review the information before subscribing to any financial product and select the one that suits them best.
Let's explore deposit accounts, savings accounts, and the common mistakes made by young adults when dealing with savings-oriented insurance products.
Deposit Accounts
The most familiar financial product we use regularly is the deposit account. As the name suggests, it allows both deposits and withdrawals, making it the most convenient among various account types offered by financial institutions. Especially with a linked check card, it facilitates seamless payments both online and offline, leading to its widespread usage.
Whether it's a gift from parents received in childhood or an account used to deposit part-time job earnings or monthly salaries, they all fall under the category of deposit accounts, specifically, ordinary deposit accounts. "Primary account" or "employee account" may offer benefits such as waived remittance fees, but they typically come with an interest rate of around 0.1-1%.
However, with a little attention, one can find deposit account products with relatively higher interest rates at commercial banks, designed to attract customers in their 20s. These products are commonly known as "20s accounts" as they target individuals aged 20-29. Keep in mind that the official names and information can be found on the respective financial institution's website under the account category.
Recently, opening new deposit accounts has become more challenging than before. However, some places allow existing ordinary deposit accounts to be converted into other products through internet banking, so it's worth considering.
20s Accounts
While the conditions for opening and using 20s accounts vary among financial institutions, they usually come with fewer strict requirements to enjoy benefits like fee exemptions and preferential interest rates. Personally, I use an ordinary deposit account for daily expenses and have a 20s account to function as an emergency fund while also receiving a small amount of interest every quarter.
Savings Accounts and Time Deposits
When saving small amounts of money bit by bit, using products with a fixed duration instead of deposit accounts is more efficient. There are two types of savings products: savings accounts and time deposits.
1. Savings Accounts: Commonly known as "regular savings," they require regular deposits of fixed amounts over a set period. At maturity, both the principal and interest are paid out. Savings accounts come with a feature that prevents withdrawals before maturity, making it suitable for those who tend to spend their money if it's available.
Note that the interest is calculated based on the average balance (average of monthly balances). While it may seem like the interest will remain constant every month, it decreases as the maturity date approaches compared to the amount being deposited. Regular savings can be further categorized into regular time deposits and free savings.
For instance, suppose you can afford to deposit 100,000 won monthly. In that case, you can choose to divide it into two regular savings accounts with a 1-year term. This way, if you need emergency funds, you can terminate one account without losing the entire interest, and the other account will continue until maturity.
2. Time Deposits: Time deposits, often referred to as "rolling deposits," involve depositing a fixed amount for a specific period into a designated account. If there's a risk of premature withdrawal or if a considerable amount is being deposited, it's better to divide the funds and subscribe to several products instead of depositing all the money at once. This approach is known as "divided savings," and it can also be applied to regular savings.
When searching for savings products, financial institutions may suggest savings-oriented insurance products, emphasizing benefits such as tax exemptions, compound interest, and high interest rates. These products require long-term payments, typically lasting 5 to 10 years, which may not be suitable for young adults in their 20s and 30s who often need money for events such as marriage, purchasing homes, or childcare. Moreover, some portion of the paid amount goes towards operational fees, making early withdrawal a loss. Therefore, be cautious and avoid confusing savings-oriented insurance products with actual savings products. Always ensure you understand and familiarize yourself with the product details before subscribing.
To conclude, when it comes to financial decisions, always take your time, carefully check all information, and proceed with due diligence to minimize mistakes. Remember, financial products require thorough understanding before investment, especially for financial novices.