Recurring Deposit Accounts - Basics

Recurring Deposit Accounts are the ideal way of investing small amount regularly for a period of desired time. And over the time, the compound interest will work in favour of you and you will have a large accumulated corpus at the end.

Recurring deposit provides an opportunity to plan specific financial goals such as daughter’s marriage or children’s education.

There are basically 2 types of Recurring Deposits Accounts available in India

01) Post Office Recurring Deposit Account &

02) Bank Recurring Deposit Account

Post office RD accounts are available at wide network of post offices all over India while all the Banks offer RD Account opening facility.

The Best part about Recurring Deposits accounts is that, you can invest as low as Rs.500 per month in these account. And over a period of time, say for 5 years or 10 years, you will have a descent corpus for your various financial goals. RD Accounts are for savers.

The Compound interest is so powerful over the time that, it multiples your wealth in a breath taking manner over the time. Thus, if you really want to start saving but at the end of month, there is nothing left for saving than RD Accounts are for you.

You have to follow “Pay Yourself First” Rule. Means every month, when you receive a paycheck, some amount of money should go towards your Recurring deposit account. Believe me,… This is very hard to follow initially but after few months, you will become disciplined and regular saver.

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.

How to Open a Savings Account?

At any point of your life, you will come across it & at that time you MUST know that, How to Open a Savings Account? So this article is all about Basics of opening a Savings Account.

Overview -

Savings account is for your short term savings needs. Say for Example, if you want to buy a car and want to save money for it than Savings account is for you. You save money every month until you save entire corpus for the down payment of your car. The benefit of Savings account is that, along with Savings, it will provide you interest income. Of course, the interest earning from savings account is very low. But its still good than nothing. However, Savings account is not for Investments. If you want to save money only for the purpose of its growth than there are many Investment Vehicles available in the market.

In general, You can park your short term (Up to 1 year) Money/Liquid Assets into Savings Account.

What is Interest Rate & How much it is? -

The second question comes is, What is the interest rate? Well, in simple language, Interest rate is the Rental on your Money / Liquid Assets. If you have an apartment and you give this apartment to some tenant than that tenant will give you a Rent and this Rent will be your Rental Income.

The same is true for Savings accounts. When you put your money into your savings account, it means that you are lending this money to the bank or Financial Institute. And that Bank / Financial Institute will give you a Rent (Interest) on your parked money.

Say for Example, if you put $ 1000 in your Savings account and the Interest rate is 5% than at the end of year, the Bank will give you $ 50 as an Interest rate. In short, Interest is the Rental on your Money / Asset.

Before Choosing a Bank / Financial Institution -

It is not that, only Banks provide Savings account facility. Many Mutual Funds, Corporates & Financial Institutes also provide the Savings account facility. So you should check the following criterias before choosing a bank in which you want to open a Savings account.

- Accessibility
- Interest Rates
- Customer Service
- Services Offered

Types of Savings Account -

Not all savings accounts are created alike. Here are some of the most common types of savings accounts:

1. Basic Savings Account: This is the most basic type of savings account that banks will usually offer. People can deposit and withdraw money from their account, the balance of which usually earns a minimal rate of interest (usually around 0.5 - 1% yearly). While savings accounts usually don't allow you to write checks or to take money out of an ATM, this can be a good thing when you're trying to save money.
2. High Yield Savings Account: High yield savings accounts usually offer better interest rates than regular savings accounts (sometimes 2% more), but come with more restrictions. Most high yield savings accounts have a minimum balance requirement and limit the amount of transactions that you can make each month. If you have enough money and don't see yourself needing to take money out of your account on a regular basis, this can be a good option.
3. Money Market Account: In general, money market accounts usually pay a higher interest rate than regular savings accounts (and often give you a higher rate for a higher balance), although they carry many of the same restrictions as a high-yield savings account. They do, however, offer you the ability to write checks if you want.
4. Online Savings Account: With the recent emergence of online banking, many institutions have begun to offer high-interest online savings accounts (anywhere from 4 - 6%). The reason that these institutions can afford such a high interest rate is because, since all of your banking is done online, they usually don't have pay the high overhead costs associated with operating a bunch of actual brick-and-mortar bank branches.

Things to Consider Before choosing a Savings Account -

- Minimum Balance Requirements
- Monthly Fees
- Interest Rates
- Access to your Money

Conclusion -

The first step of Financial Freedom starts from “Saving”. If you never Save & Invest your money, it will never work for you and the compound interest will never work for you and you can never be Rich or Financially Free. No matter what you are today, A Savings Account is for everyone. Weather you are a School going Kid, Student, Teacher, Doctor, Lawyer, Entrepreneur or anything else, The Savings Account is MUST for every one…!!!

What is a Savings Account?

We hear the word “Savings Account” in our routine talk. But do you know that What is a Savings Account and How it works?

What is a Savings Account? -

Savings accounts are accounts maintained by retail financial institutions that pay interest but can not be used directly as money ( for example, by writing a cheque). These accounts let customers set aside a portion of their liquid assets while earning a monetary return.

A savings account typically refers to an account in which one places money to earn a small amount of interest.

the savings account funds are usually easily accessible, though some banks do charge for withdrawing money early. In most cases, people can withdraw money from a savings account at any time, at least at any time the bank is open, or one has access to the bank’s ATM.

The term "bank" is used here loosely. Not only banks, but also credit unions, and money market funds companies can offer a savings account to customers. In addition to earning interest on your deposits, the savings account also provides a safe place to put your money, far better than stowing it in the mattress or the cookie jar.

How Savings Account Works? -

Many people wonder how a savings account works and is profitable to the bank or other financial institution. The simple explanation is that you are actually lending your money to the financial institution. In return for this loan, the bank offers you part of the interest rate they charge customers. Thus the bank makes a profit and you make a profit on any money in a savings account.

Why to use Savings Account? -

If you don’t plan to use your money for next couple of months than Savings Account is for you. Because it will earn some interest on your deposits as well as safety.

Most savings accounts require a minimum deposit, usually Rs.1000 or Rs.5000. An exception exists for children, who often have a savings account as their first bank account. Banks are very accommodating to children who wish to open a savings account because it is a way to build its future base of customers. Usually kids can open a savings account with about Rs.500