Fixed Deposit for Emergency Funds: Ensuring Financial Preparedness

If you are a working professional or a self-employed individual, then you would wish to grow your savings further in order to prepare for all financial uncertainties. However, there can be times when you may be needed to procure a large amount of funds to meet certain financial obligations. These could either pertain to medical, education, or renovation-related expenses, among others, which could require you to gather funds at a moment’s notice.

With the help of FDs, not only can you reserve your funds safely and earn regular interest on your funds, but also be able to withdraw money during dire situations. This will ensure you don’t solely rely on your in-hand savings or salaries during such times and are always prepared for all uncertainties. This can also serve as a key in staying secure during such situations.

Here are some benefits of booking an FD for your emergency fund requirements:

1. Guaranteed Returns and Stability

FDs usually provide stable and predictable returns, unlike most other market-linked tools. Due to this, you can anticipate potential earnings on the basis of the sum deposited and the chosen tenure. This makes opting for FDs more ideal as your earnings will only grow over time.

2. Highly Liquid

Most banks or NBFCs offer the option to either allow for partial withdrawal or premature withdrawal, which makes FDs highly liquid. These can be redeemable at any point in time and requires minimal documentation and disclosures to fill.

However, it is important to note that choosing either of the options may be liable to a reduction of the earnable interest or a penalty. You can also opt for a monthly payout option when it comes to non-cumulative FDs. For example, a Rs 50 Lakhs fixed deposit at 8.30% p.a. can earn a monthly interest of ₹33,333 as payout during the tenor.

3. Diversification

While building your emergency corpus, it is recommended to park your funds in various secure schemes in order to bring down the overall risks and also optimise your returns. Here, FDs serve as one of the safest ways of storing your funds, and can be combined with other liquid assets like money market funds or a savings account. This will help create a balanced portfolio for your emergency fund strategy.

4. Capital Preservation

FDs can be used as a means to store your emergency funds. They help in preserving your capital for extended periods to meet your requirements. This stable savings tool will help ensure that you get access to your funds quickly and be able to meet all emergency expenses. This can be done without hurting your wallet, whenever required.

5. Competitive Interest Rates

While choosing FDs, you will have access to several issuers who offer competitive interest rates, tenures, and payout options. This can have a significant impact on only your overall returns. Also, the frequency in which you can receive them can be chosen.

For example, the Bajaj Finance FD rate depends on the type of scheme and payout option chosen.  As of late, most issuers have been providing high rates of interest on most FD tenures, along with additional rates for senior citizens.

6. Good Discipline Building

By parking your savings into a secure savings scheme on a regular basis, you will also be able to inculcate good financial discipline. Your funds are usually locked away for a specified period, limiting your access to them for your small requirements. This will help in doing away with impulsive purchases and spending. This will also help you stay further aligned with your goal of maintaining emergency funds.

6. Tax Benefits

Certain types of FD accounts have the provision of offering tax-saving benefits, majorly for long-term deposits. This can provide an added benefit to your emergency corpus, and can in turn help you save more periodically. However, it is recommended to verify the liquidity of your chosen tax-saver account and assess how quickly you can obtain funds during a situation.

Now that you have an idea about the benefits of utilising FDs for storing your emergency funds, learn more about what to avoid while deciding to create a corpus:

1. Not Making Enough Deposits

If you plan on making emergency savings but fail to park enough funds for an emergency, then not only will your overall corpus be significantly lesser. Also, premature/partial withdrawals could incur costly interest rates which may either cause net-zero savings or loss, thereby resulting in a debt spiral.

Saving more is recommended for individuals with irregular incomes, those starting a business, or supporting their family members.

2. Saving Too Much

Conversely, depositing too much into an emergency fund and not leaving enough for yourself can also end up hurting you by reducing all sorts of avenues. This can leave you struggling with the chosen plan. It is recommended to strike a balance between creating savings and keeping money in hand in order to be able to meet all short- and long-term requirements.

3. Investing Emergency Savings

You may always be tempted to invest some of your emergency corpus in order to gain high returns. However, this could potentially work against you as an unexpected loss could take away your hard-earned money. In order to avoid such a situation, it is recommended to opt for a stable savings scheme.

4. Dipping Into Your FDs and Not Replenishing Funds

Choosing to avoid making short-term expenses on your in-hand savings and opting to utilise your emergency funds could have serious consequences if you do not restore the borrowed amount. This will reduce your overall savings and not keep you prepared during emergencies.