How Recurring Deposits Can Help Entrepreneurs Build a Financial Cushion
December 03, 2024
As an entrepreneur, financial stability is always a top priority. While focusing on growing your business, it's crucial to also build a financial cushion that can support you during lean periods or unexpected challenges. This is where recurring deposits emerge as a financial cushion for entrepreneurs.
In this article, we'll explore how recurring deposits work, their key benefits for entrepreneurs, and practical tips to maximise your savings.
How Do Recurring Deposits Work?
With an RD, you commit to saving a set amount each month, akin to a SIP in mutual funds. The bank compounds your interest, helping your money grow faster. Upon maturity, you receive the principal amount along with the accumulated interest.
Key Benefits for Entrepreneurs
1. Inculcates Financial Discipline
As an entrepreneur, instilling a saving habit is vital. RDs make startup savings easy by automating your monthly savings. Over time, even small sums can snowball into a substantial corpus.
2. Provides a Contingency Fund
Businesses face cash crunches from time to time. An RD acts as a contingency fund to dip into when receivables are delayed or sales are slow. It provides much-needed liquidity without resorting to expensive loans. The peace of mind of having a backup is invaluable.
3. Earns Higher Interest Than Savings Accounts
RDs typically offer 1-2% higher interest rates than savings accounts. This adds up to significant earnings on your business' idle funds.
4. Enables Better Financial Planning
RDs bring predictability to your financial planning. By saving regularly, you can map out your cash flows and allocate funds for business expansion, asset purchases, or contingencies. You can ladder multiple RDs to align with your short and long-term goals.
Maximising Your Recurring Deposits
1. Start Early, Save Consistently
The earlier you begin saving in RDs, the more time your money has to compound. Make RD investments a non-negotiable expense, just like salaries or rent. Set up a standing instruction with your bank for automatic transfers.
2. Choose the Right Tenure
Align your RD tenures with your business goals. For an emergency fund, opt for a 12-15 month RD that you can liquidate easily. For longer-term needs like expanding capacity, choose a 2-5 year horizon to build a bigger corpus.
3. Ladder Your Investments
Instead of one large RD, spread your savings across RDs of different tenures and amounts. This way, you'll have funds maturing at regular intervals, offering better liquidity. You can also reinvest maturity proceeds into new RDs, creating a virtuous cycle.
4. Automate Your RD
Put your RD investments on auto-pilot by setting up a standing instruction with your bank. This way, you won't miss instalments even when you're busy focusing on your business.
Real-World Scenario
Let's see how an RD can help an entrepreneur. Amit runs a small manufacturing unit. He decides to start a monthly RD of ₹10,000 for 3 years at 6% p.a. Here's how his savings will grow:
Year | Principal (₹) | Interest Earned (₹) | Maturity Amount (₹) |
1 | 1,20,000 | 3,964 | 1,23,964 |
2 | 2,40,000 | 16,434 | 2,56,434 |
3 | 3,60,000 | 37,684 | 3,97,684 |
By the end of 3 years, Amit would have saved ₹3.6 lakh, earning an additional ₹37,684 in interest. This corpus can be used to upgrade his machinery, hire more staff, or as a buffer for lean months.
Disclaimer: The above calculation is for illustration purposes only. Ujjivan Small Finance Bank doesn't take any responsibility regarding the authenticity of the information. Kindly use an RD Calculator to calculate your returns.
Final Thoughts
In the roller-coaster journey of entrepreneurship, recurring deposits help build a crucial financial cushion for entrepreneurs. By providing a disciplined savings approach, guaranteed returns, and flexibility, RDs empower you to save for contingencies, stabilise cash flows, and fuel your business growth.
Start small, dream big! Invest in Ujjivan Small Finance Bank’s Recurring Deposit and enjoy higher interest rates! Save for your long- and short-term goals with our RD and live a stress-free financial life. Start investing with just ₹100!
FAQs
1. Can I withdraw money from my recurring deposit account before the end of the tenure?
Yes, you can make partial withdrawals from your recurring deposit account without penalty.
2. Are the interest rates on recurring deposits taxable?
Yes, the interest earned on recurring deposits is taxable as per the prevailing income tax laws in India.
3. Can I avail of a loan against my recurring deposit?
Yes, many banks offer loans against recurring deposits as collateral. This allows you to access funds while keeping your savings intact.
4. Can I open multiple recurring deposit accounts with different banks?
Yes, you can open multiple recurring deposit accounts with different banks based on your financial needs and preferences.
5. Are senior citizens eligible for higher interest rates on recurring deposits?
Yes, many banks offer higher interest rates to senior citizens on recurring deposits.
6. Can I set up an auto-debit facility for my recurring deposit account?
Yes, most banks provide the option to set up an auto-debit facility for recurring deposits, ensuring timely deposits without manual intervention.
7. Can I close my recurring deposit account before the end of the tenure?
Yes, you can close your recurring deposit account before the end of the tenure. However, some banks may levy a penalty for premature withdrawal.
8. Can I change the tenure of my recurring deposit account after opening it?
No, you cannot change the tenure of your recurring deposit account once it is opened.
9. Can NRIs open recurring deposits in India?
Yes, NRIs can open recurring deposits in India through their NRO or NRE accounts.
10. Are recurring deposit investments safe?
Yes, RDs offered by banks are covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme, which insures deposits up to ₹5 lakh per depositor per bank.
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