Build a Rs 1 Lakh Emergency Fund

The basic premise of life is simple – it is ever changing! There’s always something new round the corner and unfortunately not all of it is pleasant. That’s why it is all the more important that you plan for the unforeseen beforehand.

Finding the Right Amount to Save

Your savings amount should always be dictated by your requirement. This is the reason why most estimates suggest that your emergency fund should be at least equal to 6 months worth of your expenses. The other way to figure this amount is relative to your monthly income. As per most estimates, having 4 times your gross monthly income as your emergency readiness fund is a good idea.

Reaching your Savings Goals

Once you decide on a savings goal for your rainy day fund, plan to save an equal amount of money every month. For example, if you plan to save Rs. 1 lakh by the end of the year, all you need to do is save Rs. 8000 per month to reach your goal. However, not everyone can afford to save that amount especially if you are starting out on your first job. In that case make sure you are able to salt away at least 20% of your take home each month as the starting point and then keep on increasing the amount as your salary increases.

Keeping the Emergency Fund Handy

Once you start saving, it is often too easy to lose the plot and start spending your savings. To prevent it, the first thing you should do is – NOT keeping it in your savings account. Instead go with a recurring deposit or even better a debt mutual fund such as a liquid fund. That way you will have the money handy and can get hold of it in case of an emergency, while simultaneously ensuring that you will have to think twice before spending it on the latest fashion accessory or iPhone.

Growing Your Emergency Fund from Zero to Rs. 1 lakhs

Let’s assume you are able to save Rs. 6,000 each month and invest it in a low risk liquid fund that provides you with an ROI of 7%.
By the end of the first month, you deposit Rs. 6000, but do not earn any interest on it till the start of the second month. Thus your starting balance for the 2nd month is Rs. 6000 and your total investment at the end of the second month is Rs. 12,000 (6,000 + 6,000). Let’s see how it goes from there.

Tabular representation of how your money grows*:

*Assuming an average ROI of 7% which might change depending on market conditions.

Thus, even with a monthly investment of Rs. 6000, you can easily reach your Rs. 1 lakh savings target within 16 months. So, get started and become a lakhpati by mid-2018!