5 MinsNovember 12, 2019
When Shalini lost her job due to downsizing by her company, she was not unduly worried. She knew the balance in her Savings Bank Account would see her through for about six months. This included her loan repayments and regular monthly bills. Thanks
to the emergency fund she had diligently maintained over the last one year, Shalini had time to look for another job to match her qualifications and experience. She did not have to touch her long-term savings to tide over this setback.
Parimal’s son got admission in the top engineering college. With very little time left to pay the fees and the college insisting on the full year’s fees in one instalment, Parimal had to borrow money from his colleagues. If not, his
son would have lost his seat, as Parimal did not have time to liquidate his investments. He has, therefore, decided that from now on, he too will keep aside some money in his Savings Bank Account to meet unexpected expenses. After all, with his son shifting to another city for higher studies, expenses, known and unknown, are bound to crop up.
Be prepared at all times
It is prudent to save for a rainy day. But most people think about saving only what is left over after all regular payments are done- EMIs, credit card payments, monthly household expenses, etc. Some
do save in bank fixed deposits or mutual funds. But in case an urgent requirement crops up, one that you have not planned for, you are forced to dip into your long term savings.
The risk with this approach is that: One, you end up withdrawing your FD before maturity or redeeming your mutual fund before it earns any meaningful returns. The financial loss can be difficult to recover. Also, since each financial instrument
is earmarked to a particular financial goal, this could mean hampering that goal. And if the deadline for that goal is fast approaching you may not have enough time to make up the deficit.
[Also Read: Determine Which Savings Account Is Right For You]
Mohan and Lata experienced this during their daughter’s marriage. Six months before the wedding Mohan’s aged father had a fall and had to undergo a hip replacement surgery. While he was covered by the family’s health insurance plan,
the amount was insufficient. The complicated surgery, post-operative tests, and medicines cost quite a bit. The couple was forced to use part of the money earmarked for their daughter’s wedding. Instead, if they had kept some money untouched
in a savings bank account, they could have accessed that easily for the medical expenses.
While building an emergency fund keep in mind certain conditions:
• It should be easy to access anytime, without any hassle. Since an emergency comes without any warning, the money required should be available immediately. A savings bank account, is hence, one of the best options for saving money for an
• It should not have any condition for withdrawing. Any investment with a lock-in period is more conducive for fixed goals since you can time the maturity of the investment with the time horizon for the goal. But for funds you require instantly,
a savings bank account is more suitable. You will not suffer any monetary loss when you withdraw the money.
• The investment should be risk-free. Since you are setting the money aside for reasons beyond your control, the money should be available when you require it. A market-linked investment that offers high returns may be volatile. Hence, choose
a savings bank account that protects your savings and offers security for your funds.
Use a savings bank account for more than your regular transactions. Since there is no limit to how much you can keep in your savings bank account, use it to build an emergency fund. Ideally, maintain enough funds to cover three to six months of
your essential expenses. And ensure that you don’t touch this money unless there is an exigency. For all other planned expenses, look at other long-term financial instruments.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.