How much money is enough when you suddenly lose your job or run out of business or there is an emergency in your family? Probably enough to survive the rest of your life. But life doesn’t work that way, does it? It might when you win a lottery or inherit your ancestral property.
The question “How much should you have in your savings account?” doesn’t have the same answer for everyone. Let us use a simple formula to estimate the answer to this question.
Living expenses/month x 3 + last emergency you had (if any) = savings account goal
The things you need to figure out here are your living expenses and the last emergency expense to get to the golden number.
Figuring out the monthly living expenses is easy if you are used to keeping a track of your expenses every month. If not then just track back your debit card and credit card bills and find the average of your expenses. That would be your monthly living expenses.
The last emergency you had might be a small visit to the doctor for any general illness. But life always can throw surprises for you when least expected. It is always good to be prepared for these surprises. In case you haven’t had any emergency till now and let’s hope you won’t in the future too, but being prepared for it doesn’t harm anyone right. A minimum of Rs 1,50,000 is the cost of good health care if one has to be operated for a fracture in India.
Is it so simple to figure out the amount to save? The answer is yes. Breaking down big goals to the size of eye balls helps us to understand the problem and work towards it.
Here’s an example to illustrate the formula.
Let’s say your monthly expenses are Rs 30,000 per month and Rs 1,50,000 is the emergency fund one needs to have in case of a medical emergency in India.
Savings Account Goal = Rs 30,000*3+Rs 1,50,000
Savings Account Goal = Rs 2,40,000
In case you want to be more conservative you can always multiply the monthly expenses by 6 or 8. This way you are more secure with your finances and face the surprises life throws your way.
Building the savings account fund
Another tough job is to figure out how to build the savings fund if you don’t have any. Here are few ways to do it.
Save as you get paid
Saving 10% of your salary as you get it will ensure you don’t spend what is meant to be saved.
Out of sight, out of mind
Follow the principal of out of sight out of mind. You don’t spend the money that you don’t have. Park your savings partly in instruments that are highly liquid. Debt funds is one option where easy withdrawal is available to you.
Fill up the fund quickly
Make sure you have your savings fund goal completed quickly. To do that deposit every windfall gain you get into the fund. For example your bonus money or tax refund or even your birthday gift, all can go into the fund. Remember, the quicker you build the fund the better you are prepared for emergencies.
Takeaways from the article:
- Follow the Simple Savings Formula
- Save as you get your salary
- Fill up the fund quickly
Keep your goal(s) in mind and work towards achieving it. Let the life not surprise you. Keep your finances in your control and not the other way round. Happy Saving!