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If 2020 taught us anything, it is the importance of having a rainy day fund. Rainy fund or emergency fund is like an account where you set aside money for unforeseen emergency expenses such job loss, home repairs or car repairs.
If you are planning to sort out your financial life or want to take the first step towards financial planning, having an emergency fund should be the first step.
Ideally, you need to park at least three months of expenses in an emergency fund. These expenses would include rent, utility bills, insurance premiums, loan EMIs, food etc. You can make a bare bone emergency fund that would account for the essentials like food and bills or you can build an emergency fund that would take care of other expenses such as occasional eating out, movies, travelling etc. You and your family members can decide on the best method to build an emergency fund.
There are different options to build and park your emergency fund. Fixed Deposits, Liquid Fund and Savings Account are the three common options for your rainy day fund. If you don’t have any savings yet, Savings Account is the easiest option to build a sizeable fund for emergencies.
However, having a dedicated savings account to park your money can help you to keep a track of your contributions and save the required amount faster.
Building an emergency fund may seem like a herculean task. That’s why we have made a list of steps that you can follow.
1.Figure out how much you want to build
Knowing how much you need to save is the first step towards creating an emergency fund. The amount that you want to save will depend on how many months’ worth of expenses you want to save. You can save three months of expenses if you feel that would work for you. Otherwise, you can accumulate a higher amount.
- Have a Plan
Now, that you know how much you want to accumulate, you need to chart out a plan with the necessary steps. A plan will help you to show you the number of weeks that you would require to build the fund along with the other aspects that you need to take care of.
If you feel intimidated, try to break it down into simple and easy steps.
- Start Small
Building the emergency fund would require some time. Initially, you can start saving a little amount of money at a time. After you become comfortable with it, you can start saving a higher amount. And, don’t forget to treat yourself as you complete the different steps.
- Set a monthly or weekly target
Once you are confident about saving a fixed amount on a regular basis, it is time to set a monthly or weekly target. Earmarking a certain amount of money towards your rainy day fund will help you to be focused.
Use Auto Transfer facility
Every savings account has the auto transfer facility through which a customer can set up automatic transfers from one savings account to another at the pre-determined date. Saving money becomes easy if it happens automatically without any manual intervention. It is a good idea to set the date of the auto transfer facility within the first few days of the month.
Conclusion:Building an emergency fund in a savings account is a very easy approach. Have a dedicated separate savings account for your emergencies. If you don’t have a second savings account, you can open a Zero Balance Saving Account like Kotak 811 instantly from the comforts of your home.
