Deposits vs. Installment Savings: Which Is Better for Beginner Savers?

The savings products that beginners in personal finance prefer most are installment savings and time deposits. They are the most popular and familiar options, and because the principal is guaranteed, you can start without any special study.
However, surprisingly few people know exactly how installment savings and deposits differ.

Usually the headline interest rate is higher on installment savings than on deposits, but if the principal is the same, the interest you actually take home is higher with a deposit. Why does this difference occur?

Suppose you have seed money of 12,000,000 won.
Is it better to put 1,000,000 won a month into a 4% installment savings account for one year, or to leave the money in a 2.5% time deposit for one year?

To give you the conclusion first: at the same interest rate, a deposit is far more advantageous than installment savings.
The installment savings account pays 220,000 won in after-tax interest, while the deposit pays 250,000 won after tax. If both rates were 4%, the installment savings would pay 220,000 won after tax, while the deposit would pay as much as 406,080 won after tax.

First of all, installment savings pay simple interest.

So only the 1,000,000 won you deposit in the first month earns the full 4% interest for 12 months. The 1,000,000 won you deposit in the second month earns interest only for the remaining 11 months, and the 1,000,000 won you deposit in the third month earns interest for only 10 months.
In this way, the 1,000,000 won you deposit in the last month earns 4% interest for just one month. After deducting the 15.4% interest income tax, the rate you actually take home is only 1.83% (about 220,000 won).

A time deposit, on the other hand, applies the full 2.5% rate for one year to the 12,000,000 won deposited in the first month.

Even after interest income tax, the after-tax interest alone exceeds 250,000 won (2.1%).

So for young people who have just started working, it makes sense to begin with installment savings and build up seed money.

For working people who have already saved at least several million won, it is better in terms of interest to set aside three months of living expenses as an emergency fund and put the rest in a time deposit.

You can find the deposits and savings products with the highest rates as of today in the 'Financial Products at a Glance' section of FINE (fine.fss.or.kr), the financial consumer information portal run by the Financial Supervisory Service.

If you select your monthly savings amount, savings period, deposit method, region, interest calculation method and so on, products are listed in order of highest rate.

Savings banks generally offer higher rates than commercial banks, and online-only products pay more interest. Even if there is no branch of that savings bank in your neighborhood, you can sign up online without visiting in person.

However, when signing up for deposits or savings, make sure your balance including interest does not exceed 50,000,000 won. This is because even if the financial institution goes bankrupt, the 「Depositor Protection Act」 guarantees up to 50,000,000 won per person.

It is safe to save around 40,000,000 to 45,000,000 won including principal and interest. Savings banks are also covered up to 50,000,000 won. In addition, defined contribution (DC) retirement pensions, individual retirement pensions (IRP), securities company deposits, principal-protected trusts and others are also covered by the 「Depositor Protection Act」.

When signing up for deposits or savings, rather than putting all your spare money into one product, it is recommended to split it across 2 to 3 products.
Even if an unexpected job loss, injury or costly family event occurs, you only need to cancel one of them, so you can reduce your losses.
For example, if you have 10,000,000 won, you would split it into three deposits of 5,000,000, 3,000,000 and 2,000,000 won. Finally, withdraw your deposit or savings on the day it matures.

The rate you were quoted when you first signed up is maintained only until maturity. From the next day, a very low rate of about 0.1–0.3% applies, so it is a good idea to sign up in advance for an automatic termination service or an automatic re-deposit service.