before we jump the gun, let’s get the basics sorted.
there is no denying that fixed deposits are one of the safest investment instruments that you can get your hands on. but there is a catch (there always is).
before we dive into the heart of the matter, let’s build the case by looking at some of the long-term pitfalls of investing only in fixed deposits (FDs):

1. inflation significantly erodes values
fixed deposits are at most likely to only get you your money back. the keyword here is ‘at most’. while a return of 7-8% may look lucrative on the face value, most of the investors forget to account for value erosion due to inflation. use CRED's financial calculator to find your estimated return on investment.

2. penalties on exits before maturity
however comprehensive your investment plans be, there is always a high chance that you may need to dissolve your FD before your maturity period. most of the banks levy a penalty of 0.5% - 1% in such cases. on top of this, your applicable interest rate may also change.
for instance, consider that you have invested ₹2 lakhs in a fixed deposit scheme for 4 years. the applicable interest rate is 8%, bringing the earned interest to ₹72,090. now, you decide to dissolve the FD after only 2 years. the applicable interest rate according to banking policies comes down to be 7.25% and a premature closure penalty of 1% is applied. hence, the effective return rate comes out to be 6.25%. the earned interest now comes down to be only ₹25,780.

3. fixed deposits are taxable
just when you thought inflation was enough, taxes come into the picture. fixed deposits are taxed at a rate of 10% if the holding period is more than one year. and since the applicable tax depends on your current tax slab, the higher your income is, the greater the tax will be.
this essentially means that a fixed deposit at an interest rate of 9% will give a return of only about 6.21% if the investor falls in the tax slab of 30%.
example: deep dive
so, let’s understand how all of these factors work in tandem to erode the value of your investment. for the purpose of simplicity, we will make approximate and absolute calculations.
consider a case where you invest an amount of ₹1,00,000 in a fixed deposit scheme for a period of 3 years and at an interest rate of 8%. at the end of 2 years, a certain need arises for which you want to dissolve the deposit. here is what will happen to your investment:

the average inflation rate for the past 2 years has been 5% (effective interest rate: 8 - 5 = 3%)

the penalty of premature closure is 1% and the new rate of interest due to the change in the time period is 7%. (effective interest rate: 3 - 1 - 1 = 1%)

the applicable tax rate on the interest is 2.4% since you fall in the 30% tax slab. (effective interest rate: 1 - 2.4 = - 1.4 %)

forget about becoming rich. you would actually be losing money every year in such a case.
use CRED's fixed deposit calculator

fixed deposits are far from ideal investment instruments and not suitable for investors who want to create substantial wealth. they should only be used as a short-term investment tool and as an alternative to savings.
what are your views about fixed deposit investments? share them with us in the comments section.

Considering Fixed deposit for investment. Here are few important points to consider while choosing fixed deposit for investment by CRED

Fixed Deposits : Know if Fixed Deposits is a Safe Investment Option - CRED

why fixed deposits may never make you rich

spending your income wisely is the basic rule of smart personal financing. however, it isn't unusual if you feel daunted about tracking every single rupee that passes through your wallet or bank account. 
the solution lies in setting up a simple budgeting system that takes the pain out of accounting and helps you identify your financial priorities.

by creating a budget, you are building a plan for spending your money. undeniably, many people get bored with hearing the 'b' word. 
still, once you address the elephant in the room and actually get down to budgeting, you have already conquered the foremost challenge to good financial discipline. 
and, now that you have crossed the biggest hurdle, this post will help you avoid additional blunders to get the maximum benefit out of personal budget.

1. failure to track expenses
the accuracy of your budget relies on your efficiency in tracking your spending. using vague figures to add up your expenses for budgeting will not take you anywhere. yet, many of us don't stop to think about how much we spend on food or personal items, often underestimating our expenditure significantly.
but how do you keep track of every penny you spend? do you need to be jotting down figures each time you purchase something and crunch the numbers each month to get frustrated and give up eventually? 
thankfully, you can download any of the several budgeting apps on your smartphone to track all your spending electronically. some people also prefer the single-card method to get a consolidated expense statement at the end of the month. 
however, different cards come with different privileges, and if you certainly need more than one card – a budget tracking app is the answer you are looking for.
some additional ideas you can implement to track your expenses seamlessly include putting your money on autopilot. putting your bills and investments on auto-pilot protects you from yourself by not letting you spend more than what you can afford. 
by putting your bills, repayments, and investment on auto-debit, you benefit in several ways. first off, you won't have to worry about missing a payment or incurring a late payment fee. 
second, paying your bills on time improves your credit score, which can give you access to better deals on your home loan or personal loan, in case you need one, saving you money over time. in addition, once all your liabilities and investments are paid off, you are only left with the money you can spend – curbing the tendency to overspend remarkably.

2. skipping the emergency fund
an emergency fund is essentially a pool of money to pay for unplanned expenses like sudden home repairs or unexpected medical bills. most experts agree that this fund should amount to three to six months of your living expenses. 
the logic is simple: without a financial safety net to fall back on, you will have no choice but to dip into your long-term savings, or worse still, take out a loan or overspend on your credit card and incur more debts. 
however, if you have a line item in your budget for an emergency fund, you will have a healthy pool of money to draw out from and meet any unexpected expenses with confidence. 
build an emergency fund today by allocating a monthly amount that you will contribute to this fund as a fixed expense on your budget. you may keep your money in a high-interest rate savings account to maximize your benefit. 

3. not planning your retirement
it is easy to neglect what we cannot see in the foreseeable future, like retirement. it is also one of the biggest financial blunders that can ruin a lifetime of hard work with financial troubles in your golden years. 
experts believe that retirement planning must start early in life and feature prominently in your budget at all ages. you may be freshly out of college or a middle-aged professional, but planning your retirement should be a priority lest you find yourself wanting at an advanced age.
in India, many adults expect their children to take care of them after retirement. a study found that while 76% of working people in India expect a comfortable retired life, only 33% are putting aside money to fund that phase of life.
if you fall in the 33% category, it is high time you change that by setting aside some money each month for your future retirement. you may use online calculators to work out how much money you'd need for a comfortable retirement and accordingly start building your savings and investments to achieve your retirement goal.

4. ignoring the bigger picture
swapping your latte for home-brewed coffee and carrying lunch to the office are excellent options for boosting your savings but not good enough to maximize your budget. 
by cutting small expenses and sweating the pennies, you are potentially ignoring the bigger picture – or bigger expenses – that are eating into your budget dramatically. 
generally speaking, two factors prevent families from saving more. one, unexpected expenses or income loss. two, high fixed costs like car payments, education costs, mortgage, etc. 
while we have already catered for an emergency fund to deal with unexpected expenses or income loss, the second factor calls for immediate attention. major purchases have the most substantial impact on your ability to save. therefore, it is vital to analyze big purchases to save more money. 
so, if you have a mortgage and you haven't revisited your interest rate in the past three years, you are possibly throwing away your hard-earned money at the banks. it is always a good idea to compare your interest rate with the average market rate regularly and see if a better deal is available for refinancing your loan.
similarly, you can compare phone and internet plans online to get cheaper deals that will save you money every single month. insurance is another competitive field where you can save money by checking the cover you need. 
of course, not having life and health insurance coverage is a blunder that can drain your emergency funds but paying for additional coverage that you don't need is also a common folly that you must avoid.

5. following a set and forget attitude
creating a budget is one thing and following it is another. life happens, and everything doesn't go as per plan. the same is the case for your budget. 
while you can use all the budgeting apps in the world, you cannot truly automate or predict all your expenses, which calls for you to regularly revisit your budget and fine-tune it to cater for any new changes.
a set and forget attitude is a dangerous thing. if you continue following the same budget year after year, you are likely to lose interest and give up. besides, your income and goals are bound to change with time, and if your budget does not reflect these changes, it is not going to take you anywhere.

6. not seeking help
a survey conducted by Standard & Poor's financial services indicated that less than 25% of South Asian countries' adult population is financially literate. another source mentions that 76% of the adult population in India is not even aware of the basic financial concepts. 
clearly, financial literacy in the country is a problem, and lack of knowledge often leads to budgeting and investment mistakes that can cost you dearly in the long run.
budgeting is hard, but there is plenty of help out there. instead of relying on friends and neighbors, it is always wiser to work with a financial advisor to get a concise and straightforward summation of your income, expenses, and long and short term goals. 
a financial advisor will also help you allocate your money to each category systematically for a better chance of achieving your monetary goals in the stipulated time period.
good things are enjoyed better in the company of friends and loved ones. that's why it is also essential to discuss and plan your budget with your partner and be on the same page. 
if budgeting is a potential cause of conflict, you can always work with a financial advisor to accommodate both your personal and shared goals into your budget.

when it comes to budgeting, it takes some time to get things right. but don't let past failures discourage you.
continue with commitment and a clear strategy to regain control over your finances and finally taste what financial freedom feels like.

Learn financial budgeting meaning and reason why a budget management is required for a stable financial income and expenses. CRED explains how to overcome usual mistakes done while budgeting.

6 Common Financial Budget Management Mistakes to Avoid - CRED

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