Bank deposits are one of the most familiar methods of asset management.
In addition to ordinary deposits used to receive salaries and pay utility bills, there are also time deposits, in which money is deposited for a fixed period.
Because they are not products whose market prices fluctuate significantly from day to day like stocks or FX, they are generally treated as relatively low-risk assets.
However, bank deposits also involve risks such as the failure of financial institutions, a decline in real value due to inflation, and opportunity loss caused by low interest rates.
This article organizes the differences between ordinary deposits and time deposits, the risks of bank deposits, deposit insurance, how to calculate deposit interest, and the relationship between deposits and inflation as a foundation for learning about asset management.
Note:
This article is a personal study note for learning about bank deposits and asset management. It does not recommend any particular bank, deposit product, financial product, or other investment. When actually using deposits or managing assets, check the latest interest rates, product terms, fees, taxes, coverage under the deposit insurance system, and other relevant information provided by each financial institution.
- What Are Ordinary Deposits?
- What Are Time Deposits?
- Differences Between Ordinary Deposits and Time Deposits
- Are Bank Deposits Really Risk-Free?
- What Is Payoff?
- How to Calculate Deposit Interest
- Is a Higher Deposit Interest Rate Always Better?
- What Happens to Deposits During Inflation?
- Principal Not Decreasing and Value Not Decreasing Are Different Things
- What Are Deposits Used For?
- How to Use Ordinary Deposits and Time Deposits Differently
- Advantages of Deposits
- Disadvantages of Deposits
- Summary
- References
What Are Ordinary Deposits?
Ordinary deposits are deposits in which money is placed with a bank or other financial institution and, in principle, can be deposited or withdrawn freely whenever needed.
They are widely used in daily life for receiving salaries and pensions, paying utility bills and credit card charges by automatic withdrawal, making bank transfers, and other purposes.
Many ordinary deposits earn interest, and the amount of interest received depends on the amount deposited, the deposit period, and the applicable interest rate.
On the other hand, because ordinary deposits emphasize the ability to withdraw money freely, their interest rates generally tend to be lower than those of time deposits and similar products.
Main Features of Ordinary Deposits
- Money can generally be deposited and withdrawn at any time
- They can be used as accounts for receiving salaries and pensions
- They can be used for automatic payments of utility bills, credit card charges, and other expenses
- They can be used for payments such as bank transfers and remittances
- They generally earn interest
- Their interest rates are often lower than those of time deposits
Example:
One way to use an ordinary deposit account is to receive your monthly salary into the account and pay rent, electricity bills, credit card charges, and other expenses from it.
It is a type of deposit that is easy to use as an account for keeping money needed for daily living.
What Are Time Deposits?
Time deposits are deposits made on the assumption that money will be deposited for a fixed period.
Depending on the financial institution and product, various deposit periods are available, such as one month, three months, six months, one year, three years, and five years.
Because time deposits are not designed for funds to be freely deposited and withdrawn like ordinary deposits, they may offer higher interest rates than ordinary deposits.
At maturity, you can receive the deposited principal and interest.
Depending on the product, it may be possible to cancel a time deposit before maturity, but a lower interest rate for early cancellation may be applied instead of the originally scheduled interest rate.
Main Features of Time Deposits
- The deposit period is determined in advance
- They may offer higher interest rates than ordinary deposits
- If held until maturity, interest can be received according to the terms agreed upon at the time of deposit
- They are generally not used for everyday payments
- The interest rate may be lower if the deposit is canceled before maturity
Example:
Suppose you deposit ¥1,000,000 that you do not plan to use immediately into a one-year time deposit with an annual interest rate of 1%.
If held for one year, approximately ¥10,000 in interest will accrue before tax.
However, the amount actually received will vary depending on taxes, the financial institution’s product terms, and other factors.
Differences Between Ordinary Deposits and Time Deposits
| Item | Ordinary Deposits | Time Deposits |
|---|---|---|
| Deposits and withdrawals | Generally unrestricted | Designed to be deposited for a fixed period |
| Interest rates | Often relatively low | May be higher than ordinary deposits |
| Salary receipt | Can be used | Not normally used |
| Automatic payments of utility bills, etc. | Can be used | Not normally used |
| Maturity | Generally none | Yes |
| Early cancellation | Normally does not need to be considered | The interest rate may be lower |
You can separate your money according to when you expect to use it, such as keeping living expenses and funds needed in the near future in ordinary deposits and placing funds that you do not expect to use for the time being in time deposits.
Are Bank Deposits Really Risk-Free?
Bank deposits are low-risk financial products compared with stocks, FX, and similar investments.
With ordinary deposits, the deposit balance itself does not normally rise and fall every day like stock prices or foreign exchange rates.
However, bank deposits cannot be considered “completely risk-free.”
Deposits also involve risks such as the following.
- The risk that a financial institution may fail
- The risk that real purchasing power may decline due to inflation
- The possibility that assets may barely grow because of low interest rates
- The possibility of missing opportunities to invest in products offering higher returns
One particularly important issue is how much of your deposits will be protected if a financial institution fails.
Japan has a “deposit insurance system” designed to protect depositors if a financial institution fails.
What Is Payoff?
The system commonly referred to as “payoff” is related to the mechanism under which depositors are protected by the deposit insurance system when a financial institution fails.
General deposits and similar deposits, including interest-bearing ordinary deposits and time deposits, are generally protected up to ¥10 million in principal per depositor at each financial institution, plus interest and other amounts accrued up to the date of failure.
Example:
If you have ¥4 million in ordinary deposits and ¥5 million in time deposits at Bank A, the total principal of your general deposits and similar deposits at the same financial institution is ¥9 million.
In this case, the ¥9 million in principal and interest and other amounts accrued up to the date of failure are generally within the scope of protection under the deposit insurance system.
On the other hand, if you have ¥7 million in interest-bearing ordinary deposits and ¥5 million in time deposits at the same bank, the total principal is ¥12 million.
In this case, the general deposits and similar deposits generally protected by the deposit insurance system are up to ¥10 million in principal plus interest and other amounts accrued up to the date of failure.
The portion exceeding ¥10 million is paid according to the financial condition and assets of the failed financial institution, so there is a possibility that the full amount may not be returned.
The ¥10 Million Limit Applies Per Financial Institution, Not Per Account
The ¥10 million principal limit under the deposit insurance system does not generally mean “¥10 million per account.”
If the same depositor has multiple eligible deposits at the same financial institution, they are combined when calculating the amount.
Example:
If you have ¥6 million in ordinary deposits and ¥6 million in time deposits at the same bank, they are treated as a total of ¥12 million even though the money is divided between two accounts.
Different Banks Are Calculated Separately
The scope of protection under the deposit insurance system is generally calculated separately for each financial institution.
Example:
If you have ¥8 million in general deposits and similar deposits at Bank A and ¥8 million at Bank B, the scope of protection is determined separately for each financial institution.
Therefore, when holding a large amount of money in deposits, one possible approach is to divide it among multiple financial institutions.
Payment and Settlement Deposits Are Fully Protected
Some deposits, known as “payment and settlement deposits,” are fully protected under the deposit insurance system.
Payment and settlement deposits are deposits that meet the following three conditions.
- They can provide payment and settlement services
- Depositors can request repayment at any time
- They do not bear interest
Current deposits and non-interest-bearing ordinary deposits that meet these conditions fall into this category and are fully protected regardless of the deposit balance.
| Type of Deposit | Main Scope of Protection |
|---|---|
| Payment and settlement deposits | Fully protected |
| Interest-bearing ordinary deposits | Up to ¥10 million in principal per depositor at each financial institution, plus interest and other amounts |
| Time deposits | Up to ¥10 million in principal per depositor at each financial institution, plus interest and other amounts |
Not All Deposits Are Covered by Deposit Insurance
It is not the case that “all money deposited in a bank is protected up to ¥10 million.”
Some products are not covered by the deposit insurance system.
For example, foreign currency deposits are not covered by the deposit insurance system.
Therefore, when using a deposit product, it is also important to check whether that product is covered by the deposit insurance system.
How to Calculate Deposit Interest
The interest received from deposits is basically determined by the “deposit amount,” “interest rate,” and “deposit period.”
For a simple calculation when money is deposited for one year, it can be calculated as follows.
Basic Interest Calculation:
Deposit Amount × Annual Interest Rate = Interest for One Year
For example, consider depositing ¥1,000,000 for one year at an annual interest rate of 1%.
Example:
¥1,000,000 × 1% = ¥10,000
The interest before tax is ¥10,000 for one year.
If ¥500,000 Is Deposited at an Annual Interest Rate of 1%
¥500,000 × 1% = ¥5,000
The interest before tax for one year is ¥5,000.
If ¥1,000,000 Is Deposited at an Annual Interest Rate of 0.5%
¥1,000,000 × 0.5% = ¥5,000
The interest before tax for one year is ¥5,000.
If ¥1,000,000 Is Deposited for Six Months
An annual interest rate is a rate based on depositing money for one year.
If money is deposited for six months at an annual interest rate of 1%, a simplified calculation can be made as follows.
¥1,000,000 × 1% × 6 months ÷ 12 months = ¥5,000
The amount before tax is approximately ¥5,000.
Actual deposit interest may vary depending on the financial institution’s product terms, day-count calculations, interest calculation methods, taxes, and other factors.
An Interest Rate of 1% Does Not Mean “1% Every Month”
Interest rates displayed for deposits, such as “1% per year,” are basically annual rates.
Depositing ¥1,000,000 at 1% per year does not mean that you will receive ¥10,000 in interest every month.
At an Annual Interest Rate of 1%:
¥1,000,000 × 1% = ¥10,000 per year
When looking at interest rates, it is necessary to check whether the rate is an “annual interest rate” and the period to which the rate applies.
Is a Higher Deposit Interest Rate Always Better?
Under the same conditions, deposits with higher interest rates provide more interest.
However, there are cases where the interest rate alone is not enough to make a decision.
With time deposits, it is also necessary to check the deposit period and early cancellation conditions.
Example:
If a one-year time deposit offers an annual interest rate of 1% and a five-year time deposit offers an annual interest rate of 1.2%, the five-year time deposit has the higher interest rate.
However, if market interest rates subsequently rise significantly, having your funds locked in for five years may prevent you from immediately moving them into a product with a higher interest rate.
In this way, it is necessary to consider not only the interest rate but also when you plan to use the funds and the deposit period.
What Happens to Deposits During Inflation?
An important factor to consider with bank deposits is their relationship with inflation.
Inflation is a condition in which the prices of goods and services continue to rise and the purchasing power of money declines relatively.
Even if the deposit balance itself does not decrease, rising prices reduce the amount of goods and services that can be purchased with that money.
Example:
Suppose there is a product that currently costs ¥100.
With ¥10,000, you can purchase 100 units.
If inflation later raises the price of the product to ¥125, the same ¥10,000 can purchase only 80 units.
Even though the deposit balance remains ¥10,000, the amount of goods that can actually be purchased has decreased.
This kind of decline in real value needs to be considered.
Comparing Deposit Interest Rates and Inflation Rates
When considering the real value of deposits, not only the deposit interest rate but also the rate of inflation is important.
Example:
Suppose the deposit interest rate is 1% per year and prices rise by 3% annually.
The deposit balance increases through interest, but because prices are rising faster, real purchasing power may decline.
Conversely, if the deposit interest rate exceeds the rate of inflation, it becomes easier to maintain or increase the real purchasing power of the deposit.
Principal Not Decreasing and Value Not Decreasing Are Different Things
An important point when understanding deposits is that “the account balance does not decrease” and “the value of the asset does not decrease” are not necessarily the same thing.
If ¥1,000,000 is kept in an ordinary deposit account, the numerical amount of ¥1,000,000 basically remains unchanged, excluding interest, deposits, and withdrawals.
However, if prices have risen significantly 10 years later, the goods and services that can be purchased with that ¥1,000,000 may be fewer than they are today.
In this sense, bank deposits also involve inflation risk.
What Are Deposits Used For?
Deposits are not financial products intended to generate large capital gains.
On the other hand, they are easy to use when needed and require less attention to price fluctuations than stocks, FX, and similar investments.
Therefore, they can be used as a place to keep funds such as the following.
- Money used for daily living
- Funds received as salaries or pensions
- Funds used to pay utility bills and other expenses
- Money expected to be used in the near future
- Funds reserved for unexpected expenses
- Funds temporarily held until they are invested
In asset management, not only significantly increasing assets but also keeping funds in a form that can be used immediately when needed plays an important role.
How to Use Ordinary Deposits and Time Deposits Differently
Rather than one being superior to the other, ordinary deposits and time deposits can be used differently depending on when the funds are expected to be needed.
| Purpose of Funds | Possible Deposit Method |
|---|---|
| Monthly living expenses | Ordinary deposits |
| Funds needed for emergencies | Ordinary deposits |
| Funds expected to be used in several months | Ordinary deposits or short-term time deposits |
| Funds not expected to be used for some time | Consider time deposits and similar options |
Even if the interest rate on a time deposit is higher than that on an ordinary deposit, placing funds that may be needed in the near future into a time deposit may require early cancellation when the money is needed.
It is important to consider not only the interest rate but also “when the money may be needed.”
Advantages of Deposits
- The mechanism is relatively easy to understand
- Ordinary deposits are easy to withdraw when needed
- They do not have daily market price fluctuations like stocks or FX
- They are protected by the deposit insurance system within certain limits
- They can be used in daily life for receiving salaries, paying utility bills, and other purposes
Disadvantages of Deposits
- Large returns are difficult to expect compared with stocks and similar investments
- Interest income is small when interest rates are low
- Real value may decline due to inflation
- Time deposits may lock up funds for a certain period
- Protection under the deposit insurance system is subject to conditions regarding the type of product, amount, and other factors
Summary
Ordinary deposits are familiar deposits that generally allow funds to be deposited and withdrawn at any time and can also be used to receive salaries and make various payments.
Time deposits may offer higher interest rates than ordinary deposits in exchange for depositing funds for a fixed period.
Bank deposits are low-risk assets compared with stocks, FX, and similar investments, but they are not completely risk-free.
If a financial institution fails, interest-bearing ordinary deposits, time deposits, and similar deposits are generally protected by the deposit insurance system up to ¥10 million in principal per depositor at each financial institution, plus interest and other amounts accrued up to the date of failure.
In addition, even if the deposit balance itself does not decrease, rising prices due to inflation may reduce the real purchasing power of money.
Therefore, deposits should be considered not only in terms of “how much profit can be increased,” but also in terms of their role in “how to keep funds that can be used when needed while taking safety into consideration.”
References
