How to Grow Fixed Deposits?

How to Grow Fixed Deposits?

Fixed Deposits are beneficial only when they grow with time. The rate of interest is an attraction in FD, but it is not useful when the deposit is less. People who open FD with small amount seldom get benefit from it even if the tenure is long. FD with long tenure is useful for them who have a huge deposit.

Defining Growth.

Deposits in banks are made to make money secure and to grow it. Nobody would deposit money if it doesn't grow. Growth can be defined as the increase in the amount of money deposited in a bank or in a financial institution or in any investments which gives satisfactory returns.

Generally, growth is regarded as interest which the bank pays the depositor either regularly as in savings account or at the end of the term as in fixed deposits. However, interest cannot be defined as growth. Although interest contributes to growth, it does not have any meaning without the principal, which governs it.

The Principal and Interest.

Interest does not grow by itself and it does not exist on its own. It needs a principal to rely on. If there is no principal, there is no interest. If principal is less, the interest will be less as well. If principal is more, interest will be more.

Since interest is based on principal and time (the number of years the principal amount remains deposited), it is always the principal which determines growth in a bank deposit.

Growing FD.

Money does not grow automatically. Growing fixed deposits is not difficult, but it takes time. FD should grow consistently and when we say this, we mean growing the principal amount. Our focus should be on growing the deposit rather than reaping the interest.

The best way to grow FD would be to select a short tenure (say 6 months) irrespective of the principal amount. When the FD matures at 6 months, we should add some more money to it and create a new FD for the next 6 months. This would mean, opening a new FD by adding some more money to the maturity amount of the previous FD.

Maturity amount will always be the principal amount of the previous FD and its interest. So, in this manner, when we open two fixed deposits in one year, the second FD will have a higher principal amount compared to the first one. By repeating this process every six months, we can see the principal amount growing.

How this Works?

Lets say, we want to start a fixed deposit of Rs.5000/- and grow it. We approach a bank (preferably where we have an account for savings) to open one FD account. This could be done by sitting in our home, if we have net banking enabled for our savings account.

To open FD, we have to login to our account and click FD tab / link and fill up some information which the system asks to do. We put the amount (Rs. 5000/-) as decided and select 6 months as duration or tenure. The system will automatically calculate the interest amount as per the prevailing rate of interest and show the total by adding it to the principal of Rs. 5000/-.

We have to agree and confirm the amount to create FD. Once FD is created, the amount will be debited from our savings account and will be deposited in our FD account. We have to wait for 6 months for the FD to get mature. After 6 months, the FD will be closed automatically and the amount will be deposited in our savings account.

We have to repeat this process again to open the second FD. This time the principal amount should be higher than the maturity amount of the previous FD. So, the process will be:

1st FD

We begin the first FD by depositing the principal amount. The tenure will be six months. The interest amount will get added to the principal amount and will be credited to our savings account on the date of maturity.

Principal Amount + Interest Amount = Maturity Amount.

2nd FD

The second FD will be the continuation of the first one. The maturity amount of the first FD has to be increased by adding any other amount. This increased amount will be the principal for the second FD. Just like the 1st FD, the interest amount will be added to the principal and will be credited to savings account on maturity, i.e. after six months.

Maturity Amount of 1st FD + Any other amount + Added Interest = Maturity (2nd).

3rd FD

The third FD will be the repetition of the second. Here again, the maturity amount has to be added with any other amount to form the principal for the 3rd FD. The interest will be added to the principal and credited to savings account after six months when FD matures.

Maturity Amount of 2nd FD + Any other amount + Interest = Maturity (3rd).

Any Other Amount.

Any other amount could be any amount which increases the principal for the next FD. The more money we add, the better.

This is the process which has to be repeated to grow the principal in FD. If this is continued meticulously for some years, the FD will grow.

The Advantage of Growing Principal.

Our savings improve when principal amount in FD grows consistently. If we continue this process for some years, we will see positive growth in FD. The growth will depend upon the amount that we add every six months to make a new FD. This method is useful for people who have less income.

Grow FD Gradually.

Fixed deposit is a time tested method for saving. Money in FD should be allowed to grow. At the same time, we should not put too much money in FD, because it could turn counterproductive if we don't have alternate savings. We may have to close FD prematurely, if we run out of money. So, it is important to make deposits as per our capacity.

People who are better financially can also follow this method to grow their money. FD should grow gradually without affecting other savings. This could be done with some planning. Slow, yet consistent growth has always been the rule for financial development. We should follow this rule to grow our money.

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The previous post was: Credit Cards.

The next post is: Economy.

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