The Role of Fixed Deposits in Building an Emergency Fund

The last few years have seen an alarming number of people face financial emergencies. From pay cuts and job losses to expensive medical treatment owing to the COVID-19 pandemic, we were forced to take a step back and turn to emergency funds. These contingency funds assist us during our moments of hardship as well as make sure that we don’t have to extinguish our savings and salaries to cope with emergencies. 

Also Read: How Do Fixed Deposits Compare to Other Savings Options?

Building an Emergency Fund with Fixed Deposits

Let’s see why Fixed Deposits have emerged as a stellar choice for building an emergency fund –

• Stability and Guaranteed Returns: Think of fixed deposits as a sort of seasoned performers that offer stability and predictability. When you put your money into an FD, you secure a fixed interest rate over a predetermined period. Unlike the rollercoaster that is the stock market, FDs provide unwavering stability, ensuring your savings grow steadily.

• Liquidity: In our journey of financial decisions, growth is as vital as accessibility. FDs strike a perfect balance between these two. Most banks and financial institutions will allow you to withdraw from your FD in case of emergencies. Agreed, this facility might be accompanied by a reduction in interest or perhaps even a slight penalty. But this flexibility ensures that you can access your financial safety net when you need it. 

• Capital Preservation: If you think of your emergency fund as your ace in the hole, then FDs are the perfect vault where you can keep it safe. With fixed deposits, your principal amount is safeguarded against volatility, assuring you that your money is readily available. Your capital remains better than intact - it increases over time - and is ready to rescue you when life's unexpected curveballs come your way.

• Diversification: From a healthy diet to a financial portfolio, diversification is critical to success. FDs can be the star asset of your emergency fund, diversifying it to reduce risks. For maximum benefits, try combining FDs with other liquid assets like money market funds or savings accounts to create a balanced emergency fund strategy. This diversity spreads the risk and ensures you have multiple financial access points during a crisis. 

• Earning Competitive Interest: FDs are not just about safety; they bring in the promise of assured gains with competitive interest rates. These could vary among banks and institutions, so shop around for the best terms. Try exploring various FD options on an online financial platform like Bajaj Markets to find your most suitable plan. Sow the seeds of compounded returns on your fixed deposit and watch it grow over the years. 

• Discipline and Goal-Oriented Saving: Building a long-term emergency fund requires much discipline and consistency. FDs enforce this practice by locking in your funds for a set period. This weeds out the risk of impulsive withdrawals and keeps you committed to building a financial safety net. The maturity date of your FD is the sweet fruit of your perseverance and your commitment to your financial goals. 

• Tax Benefits: Fixed deposits, with a tenure of five years or more, come with tax benefits of up to ₹1.5 Lakhs, as per Section 80C of the Income Tax Act, 1961. This acts as the icing on the cake that is your emergency funds and enhances its growth and profitability. 

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Why are Emergency Funds Important?

Domestic markets continue to fluctuate without certainty, tossing and turning economic stability into a nightmare for investors. Despite the government announcing several relief measures, fears of inflation and rate hikes cause financial stability to remain out of our grasp. 

In the face of such looming uncertainty, our need for an emergency corpus has come to the fore. With a proper emergency fund, you don’t have to lose the saved-up cash that you would use to buy a new house or spend on your child’s higher education.

More Tips to Save Money

Ideally, an emergency fund should offer you security, liquidity, and decent long-term growth to properly defend your day-to-day expenses without adversely impacting your savings, or credit scores. Thus, the wise decision will be to gradually set aside money amounting to around three to six months’ expenses in your emergency fund. 

What decides the success of such a financial backup is identifying the correct financial instrument to invest in and grow into an emergency fund. Besides helping you cope with your current cash crunch, this will also prepare you for future difficulties as well. With numerous investment instruments and types of assets to choose from, remember to analyse and pick the one that best ensures the safety of your savings. 

From the middle of 2022, RBI has time and again hiked repo rates, spurring banks and Non-Banking Financial Companies (NBFCs) to offer fixed deposits at higher interest rates. Recently, many renowned banks made the news when they increased the interest rates on FDs of various tenors. Furthermore, senior citizens are eligible for a higher interest rate on their deposits than younger individuals. 

An emergency fund acts like a parachute; it saves you from the potential freefall that can occur due to a financial crisis. Start creating your emergency fund today with a long-term Fixed Deposit plan on Bajaj Markets and sail through any curveball life throws at you! Choose your deposit amount, plan tenor, and interest rate and easily calculate how much return you will get at maturity. See your savings make impressive growth over time as you earn up to 8.75% interest annually, only on Bajaj Markets!