How recurring deposits can be used to manage yearly expenses

In this article, Suresh explains how he uses bank recurring deposits to efficiently manage his family’s annual expenses. I requested Suresh to elaborate his email into an article in the hope that it will benefit readers.

Hello readers, my name is Suresh. One of the long-time freefincal readers. This year, I had to pay an advance tax of about Rs. 2.34 lakhs by March 15 2022. I only anticipated a tax of Rs. 90,000 but I had made a mistake in accounting my income and left out some capital gains.

To make matters worse, this was fees month for my two girls – close to one lakh! Then I had to pay both my life and health insurance premiums – about Rs. 75,000. When my wife realise this she was livid. “How can you call yourself a personal finance enthusiast and end up managing money so badly?!”

I apologised for my tax miscalculation but assured her things are not as bad as it seems. The only consequence of the extra tax is we will not be able to invest for our retirement and the girl’s future for this month. The rest are all taken care of.

Thanks to the power of recurring deposits I learn from this article – Managing Recurring Expenses on Auto-Pilot. The school fee and the premium payment are not unexpected expenses. We have recurring deposits (RDs) running for each of them. Once they mature, I can happily pay the school fee and insurance premiums.  Of course, the advance tax payment is also not an unexpected expense but I made a mistake in the computation. No need to rub it in. Got my wife for that!

Pattu sir, ask me to illustrate with an example. So here goes. Suppose you have some annual expenses in March 2023 and July 2023.

1. Start an RD in March 2022 for 1 year or 12 monthly instalments. You can easily open it and set up a standing instruction via your online banking account in under a minute! Ensure you opt for payback interest and principal to SB account option. Some banks will try to cover the lump sum into an FD!
2. So this means, the first instalment will start in March 2022 and end in Feb 2023 with maturity in March 2023.
3. Ensure the maturity is a few days before the expense deadline. It is better to maintain a diary of online expenses and deadlines. Also, see: How to help our life partner manage money in our absence.
4. Similarly, the second RD can be started in July 2022 and set to mature in July 2023.

We maintain four RDs for large annual expenses: (1) for life and health insurance premiums. (2) Our girl’s school fees and two more for personal obligations. Each month I transfer the total instalment into another SB account linked to the RDs for auto-debit.

Alternatives: If you wish to avoid the hassle of opening RDs at different points of the year, you can simply open a liquid fund or money market fund or arbitrage fund and set up a SIP. As and when there is a need, you can withdraw from the fund and pay. For fund recommendations, see: Handpicked List of Mutual Funds Jan-Mar 2022 (PlumbLine)

There is no difference in the taxation and not much difference in the interest rates. So you can choose a system that you are comfortable with.  I personally prefer RDs because I know the maturity amount exactly and this helps me decide the RD instalment necessary as per the next year’s expenses. This is harder to predict with mutual funds but certainly possible.

Beware of inflation and life changes: Health insurance premiums increase every few years. School fees and other expenses for children gradually increase as they age. So this much be kept in mind. It is better to increase the monthly amount meant for these expenses by about 10% each year or as required.