How Recurring Deposits Can Help Entrepreneurs Build a Financial Cushion

As an entrepreneur, financial stability is always a top priority. While focusing on growing your business, it's crucial to also build a financial cushion that can support you during lean periods or unexpected challenges. This is where recurring deposits emerge as a financial cushion for entrepreneurs.

In this article, we'll explore how recurring deposits work, their key benefits for entrepreneurs, and practical tips to maximise your savings. 

How Do Recurring Deposits Work?

With an RD, you commit to saving a set amount each month, akin to a SIP in mutual funds. The bank compounds your interest, helping your money grow faster. Upon maturity, you receive the principal amount along with the accumulated interest. 

Key Benefits for Entrepreneurs 

1. Inculcates Financial Discipline

As an entrepreneur, instilling a saving habit is vital. RDs make startup savings easy by automating your monthly savings. Over time, even small sums can snowball into a substantial corpus. 

2. Provides a Contingency Fund

Businesses face cash crunches from time to time. An RD acts as a contingency fund to dip into when receivables are delayed or sales are slow. It provides much-needed liquidity without resorting to expensive loans. The peace of mind of having a backup is invaluable. 

3. Earns Higher Interest Than Savings Accounts

RDs typically offer 1-2% higher interest rates than savings accounts. This adds up to significant earnings on your business' idle funds. 

4. Enables Better Financial Planning

RDs bring predictability to your financial planning. By saving regularly, you can map out your cash flows and allocate funds for business expansion, asset purchases, or contingencies. You can ladder multiple RDs to align with your short and long-term goals. 

Maximising Your Recurring Deposits 

1. Start Early, Save Consistently

The earlier you begin saving in RDs, the more time your money has to compound. Make RD investments a non-negotiable expense, just like salaries or rent. Set up a standing instruction with your bank for automatic transfers. 

2. Choose the Right Tenure

Align your RD tenures with your business goals. For an emergency fund, opt for a 12-15 month RD that you can liquidate easily. For longer-term needs like expanding capacity, choose a 2-5 year horizon to build a bigger corpus. 

3. Ladder Your Investments

Instead of one large RD, spread your savings across RDs of different tenures and amounts. This way, you'll have funds maturing at regular intervals, offering better liquidity. You can also reinvest maturity proceeds into new RDs, creating a virtuous cycle. 

4. Automate Your RD

Put your RD investments on auto-pilot by setting up a standing instruction with your bank. This way, you won't miss instalments even when you're busy focusing on your business. 

Real-World Scenario

Let's see how an RD can help an entrepreneur. Amit runs a small manufacturing unit. He decides to start a monthly RD of ₹10,000 for 3 years at 6% p.a. Here's how his savings will grow: 

By the end of 3 years, Amit would have saved ₹3.6 lakh, earning an additional ₹37,684 in interest. This corpus can be used to upgrade his machinery, hire more staff, or as a buffer for lean months. 

Disclaimer: The above calculation is for illustration purposes only. Ujjivan Small Finance Bank doesn't take any responsibility regarding the authenticity of the information. Kindly use an RD Calculator to calculate your returns.