Savings Account vs. Fixed Deposit: Which is Best for Growing Money?
Both a savings account and a fixed deposit serve different purposes, but which one is better for growing your money?
The Savings Account
A savings account is a versatile financial tool designed for emergency funds and everyday transactions. It allows you to receive, withdraw, and conduct online transactions. India offers a modest interest rate of around 3-4%, while in other countries, this interest rate can be significantly lower. Savings accounts are known as 'demand liabilities' for banks, as customers can access their funds anytime through various methods.
The Fixed Deposit
A fixed deposit, on the other hand, is an excellent choice for earning interest on a lump sum amount that you don't need to access in the short term. With interest rates currently ranging from 5-7%, some smaller finance banks even offer as high as 8-9% per annum. This makes the fixed deposit a more attractive option for those seeking better returns. You can opt for monthly or quarterly interest, and remember that the interest earned on a FD is subject to taxation.
Flexi-Deposits: A Blend of Savings and Fixed Deposit
Flexi-deposits offer a unique solution by combining the flexibility of a savings account with the returns of a fixed deposit. Excess funds beyond a certain threshold are automatically transferred to a fixed deposit account, allowing you to earn interests without the hassle of manual transactions.
Which One is Better for Growing Your Money?
When it comes to growing your money, a fixed deposit undoubtedly stands out. The higher interest rates of fixed deposits make them the more lucrative option, especially for those who are not in the immediate need to access their funds. However, consider the compounding impact of inflation, which can significantly reduce the real value of your money over time.
The Role of Inflation in Money Growth
India's inflation rate, primarily measured by changes in the Consumer Price Index (CPI), has been a cause for concern. For instance, in November 2013, the provisional annual inflation rate was 11.24%, while in December 2017, it hit 5.21%, surpassing expectations. This trend of fluctuating inflation rates without much control has posed a significant threat to the purchasing power of money.
It's crucial to understand that even if banks offer generous interest rates, these may not keep pace with the inflation rate. For example, if the inflation rate is 1.5% per month and the interest rate on your deposit is lower, your money's real value can erode over time. It's worth noting that recent government measures to manipulate inflation rates to suit political objectives can further exacerbate this issue.
In conclusion, while savings accounts offer convenience and liquidity, fixed deposits provide higher returns, albeit with a potential risk of inflation erosion. Understanding these aspects is key to making informed financial decisions that help your money grow effectively in today's economic landscape.