What a 30- or 90-day lock-up actually costs

Locked products pay more than flexible ones. That is the designed compensation: you give up freedom for a period, and you get a bit more interest for it. Most people stop there — compare the two rates, decide it looks worth it, lock.

That covers about a third of the bill. Wikipedia defines opportunity cost as the highest-valued alternative given up when choosing — the alternative given up, not the interest given up. In a lock-up, the rate spread is usually the smallest of the three costs.

Three separate bills

Pulling them apart helps:

• Rate spread. Locked rate minus the flexible rate over the same period. The one that is easy to compute, the one most people compute, and usually the smallest of the three.
• Exit cost. What it costs if you must get the funds out mid-term. Possibly forfeiting all accrued interest, possibly no exit at all, possibly a defined early-redemption path. Rules differ by product; read the terms on the page you are looking at.
• Forgone uses. What this money could otherwise have done during the period — a price you wanted to buy, a better opportunity elsewhere, or something in your own life that needed cash.

The third cannot be computed precisely, and that is exactly why it gets treated as zero. Writing it down explicitly — even as one line, “I might want to add to a position in these three months” — beats pretending it is not there.

A worked hypothetical you can rerun

Everything below is a hypothetical figure, used to show the structure. It describes no real product.

Assume: flexible at 3% a year, a 90-day locked product at 5%, and 10,000 units to place.

• Locked for 90 days: 10,000 × 5% × 90 ÷ 365 ≈ 123 units
• Flexible over the same period: 10,000 × 3% × 90 ÷ 365 ≈ 74 units
• Spread ≈ 49 units, roughly 0.49% of principal

That 0.49% is the entire certain gain from giving up 90 days of access. Now the second question: how likely is it that you will need this money within those 90 days? If the odds are not low, you are trading the bad position you would be in if you did need it for 0.49%.

And a third: if you must exit and the penalty is forfeiting all accrued interest, then in the worst case you get neither the 49 nor the 74 the flexible product would have paid — the net result is ninety days spent for nothing. That is the real exposure in a lock-up, and comparing two headline rates makes it invisible.

To run it with your own figures, put the flexible rate and the locked rate through the earnings calculator one after the other — the difference between the two results is the spread for that period, and it is easy to lose the compounding difference doing this by hand.

What a longer term is really betting on

Go from 30 days to 180 and the spread grows — but the other two bills grow faster. The reason is not complicated: the longer the window, the less you can predict what happens inside it. Markets, rates elsewhere, and your own need for cash all get less knowable.

So a long term is a bet on one proposition: nothing better than this rate will turn up for the money during that window. That bet is reasonable when rates are high and conditions are calm. It is a worse bet when rates themselves may rise, or when you think the market is about to move.

One practical alternative is to stop treating term as a binary. Splitting funds across staggered maturities is a middle path between capturing longer rates and keeping some part reachable. It does not remove the opportunity cost; it stops it concentrating on a single date.

When locking genuinely is worth it

Not every lock-up is a bad trade. In these cases the cost really is low:

• The money already has a long horizon — you have decided it will not be touched for a year. The forgone-uses bill is close to zero, so the spread is close to free.
• You already hold enough liquid funds. What gets locked is the layer you are confident will sit still; the emergency and opportunistic money lives elsewhere.
• You know you fidget. For some people the real value of locking is being unable to touch it. That is a legitimate reason — it just deserves to be named as the main motive rather than dressed up as a rate decision.

The mirror image: if you need “I can always redeem early” to talk yourself into locking, the money probably should not be locked. You have just priced what early redemption costs.

Working out which layer the money belongs to comes before rate comparison; flexible versus locked covers the same decision from the product side.

Common questions

Locked pays two points more than flexible. Worth three months?

Convert the spread into an absolute number first. On the hypothetical above — 10,000 units, two points, 90 days — it is about 49 units, roughly 0.49% of principal. Then ask two things: how likely you are to need the money in those three months, and what you would forfeit under that product’s terms if you exit early. The second answer usually matters more than the spread.

What exactly do I lose by redeeming early?

It differs by product. Forfeiting all interest accrued during the lock is common; some products do not permit early exit at all; others define a separate early-redemption path. This has to be read on the page you are actually looking at rather than assumed from experience — and it belongs in the decision, not as a footnote discovered afterwards.

Is splitting funds across staggered maturities better?

It does not remove opportunity cost; it spreads it across dates so that some portion is always reachable. The trade-off is smaller individual amounts and more operations. It suits money you mostly will not need but cannot rule out needing. If you are certain it will sit still, splitting adds work for nothing.