How Does Recurring Deposit Account Work?

How Recurring Deposit Account Works?

Recurring Deposits work on the principle of the power of the compound interest. Just think that, every month you earn. You receive a paycheck from your employer and you bring your money at your home. Now, what do you do with your money First? I mean what is the first expense you do every month?

Obviously you will pay all of your bills, rental, mortgage, credit card bills, loan EMIs and every other expense and you give yourself the excuse that, I will try to save money this month. But you can’t save money. But do you know that this is the false money spending habits. Unfortunately, in countries like India people don’t know much about how to and why to save money? and that’s why most of the people fail to build serious wealth in their lives.

And this is why the concept of “Pay Yourself First” and Recurring Deposit Account came into exists.

What it means by “Pay Yourself First” -

Well, pay yourself first means every month whenever you get a paycheck, some amount of money will automatically diverted towards Recurring Deposit account even before you do any other expense. This is how smart and financially free people do savings. They make Savings a Habit.

There are basically 2 types of Recurring Deposit Accounts -

01) Bank Recurring Deposit Accounts -

A normal fixed deposit means that you put in an amount and, after a specific period of time, you can withdraw it. Meanwhile, you do not touch the money or add to it.

A recurring deposit works on a similar principle. The difference is, instead of putting in a bulk amount, you put in a specified amount (which you decide when you open your recurring account) every month.

This could be a small amount that will not pinch your pocket or hinder your lifestyle.

At the end of the tenure, you get a nice amount.

02) Post-office Recurring Deposit -

This works the same way as a bank recurring deposit.

The difference is, you have to make a trip to the post office to deposit your money.

Also, the minimum tenure for a post office deposit is five years. You can choose a shorter tenure for a bank recurring deposit.

A bank deposit is more convenient but a post office recurring deposit offers a higher interest rate of 7.5% per annum. Each bank does offer a different rate, but chances are you will not get as much as 7.5%.

The Compound interest is so powerful over the time that, it will give you handsome returns over the time. Only a small amount saved monthly can transform into a huge amount over the time.