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Fixed Deposit as an Emergency Fund

Emergencies don’t come knocking. It has the potential to wipe our savings for our other financial goals, or worse, we may enter the debt cycle. Hence, it is important to have an emergency fund.

Most of us are familiar with Fixed Deposit. We use it as an option to save for the long-term. But did you know it can help you during an emergency?

Life will still throw lemons, and that doesn’t make you feel good. This also applies to money. Therefore, having an emergency fund should be primary financial aim for any individual. A work loss, a cut in income, medical accident or divorce are few instances that can financially derail you. An emergency fund can serve as a cushion in these circumstances.

The aim of the emergency fund is to provide enough resources if you don’t get your salary and still support your lifestyle without breaking your other savings and investments. In an emergency fund, you should hold at least three or six months of expenses. E.g., your monthly rental, food, travel expenses, and school fees is Rs.50,000. So, at any stage, you should have an emergency fund with at least Rs.1.5 lakh to Rs. 3 lakh.

What Makes FD a good Emergency Fund

Tenures: There are loads of options when it comes to tenure. Banks offer FDs varying from 90 days to five years of tenure. And you can pick a tenure that suits your needs best.

Simple withdrawal: If an emergency happens, the deposit can be broken, and the balance will be transferred to the bank account automatically. You will gain your principal and any interest.

Safety: One of the safest investing choices available is bank fixed deposits. As you will get a fixed rate of interest, you don’t have to worry about market volatility.

Deposit insurance: Bank deposit products of up to Rs. 5 lakhs are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the RBI.

Easy to open: You can open a fixed deposit online through net banking or through your bank’s apps.

How to create an Emergency Fund in a Fixed Deposit?

You can create a Fixed Deposit or multiple Fixed Deposits for emergencies. If you are planning to create a single FD, you can save up a sizeable amount before opening a FD. To start, you can open a Recurring Deposit and save a fixed amount every month. E.g., you want to save Rs.1 lakh within 6 months, you can start a monthly RD of 17,000 to build your emergency fund. You can use a RD Calculator to calculate the amount that you would get on maturity. After the RD matures, you can open the FD with the same amount.

Nowadays you can open an FD with Rs.5,000. So, if you want to create multiple FDs, you can do that as well. For instance, you can park your bonus money or any such unexpected credits in an FD. You can set your FDs on auto renew so that you don’t have to manually renew your FD every time.       

And until you break your FD, your money would continue to grow by earning interest.      

Conclusion:

Emergency Fund is an important component of everyone’s lives. It can be of great help during unexpected events. And out of the different saving options to build an emergency fund, Fixed Deposits are an easy and hassle-free way of saving money for future surprises.  


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