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10 July 2020 | 4 min read

What Do You Need To Know While Building A Contingency Fund? 

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A contingency or emergency fund comes in handy on your rainy days. Whether you just had a car accident, a significant health complication or lost your job, extra cash stashed away in some corner of your existence is always a good idea. 

The best time to start building your emergency fund? Yesterday because this is something that should be taught in school or college, but you should be because mindlessly spending and not saving for the future is a bad idea. If you still haven’t started working on a contingency fund, this is where you start. 

What Is An Emergency Fund?

An emergency fund is your own hard-earned money stored away in a Savings account (with reasonable interest rates) or a different bank account together. The idea of having an emergency fund is you don’t reach out to it for every basic survival (or luxury) needs. Ideally, your emergency fund should be easily accessible so that you can take out that money in a moment of significant crisis. And by easily accessible, we mean, without any deductions levied because of early extraction. 

The thumb of rule for the amount of money you should have in your emergency fund should equal to your salary for three months. If you can go big, make it six months. This is usually the amount of time it takes for a person to recover from financial blows, including unemployment. 

Do You Need It?

Yes, everyone needs it and should have an emergency fund. Period! 

How To Build An Emergency Fund?

The first step is to open a secondary account. digibank offers five per cent interest on your savings, with zero balance account. Plus, since it is entirely digital, the process of opening an account is altogether hassle-free as well. If you are storing away this much money, you might as well get some interest on it. 

Next up, follow the golden rule of 20-80. This means spending 80 per cent of your salary and saving the remaining 20 per cent. If you have zero self-control and cannot seem to save up 20 per cent of your salary, go for an account from which you cannot readily take out the money.  Also, when building an Emergency Fund, you should pay yourself first and put that 20 per cent of your salary to building your fund. 

Second, cut down on your expenses. You can do without that latte you have every alternate day or the weekend brunches with your friends. No one is telling you to give up living but make it once a month instead of every weekend, and you will save up plenty. Make a habit of budgeting everything and if by the end of the month, you have surplus cash in your account, transfer it to your emergency fund. Cancel out all the subscriptions you are not using. Do you have the time to consume all the content on Netflix, Prime, Hotstar and other streaming services every month? No, you don’t! Money saved from this can be put in your emergency fund.

Shop for the things you need. Not something you will use in the unforeseen future. If you have a habit of hoarding things, go on a declutter spree and sell items you haven’t used in a long while. Put the extra money in your Emergency Fund.  Once you have set up your account and are regularly putting money in the Emergency Fund, set yourself a goal. For instance, in six months, you will save up at least income worth three months of your salary. Now, diligently work towards achieving this goal. 

After a month, check your progress, and if you can deliver on your targets, set a stretch goal for yourself. Now, a stretch goal is used by businessmen. It usually means setting another, more robust goal for yourself once you have become comfortable with your current goals.  Your stretch goal should be having saved up your three-months (or six) worth of salary one month earlier than the date you initially set on. This will give you that extra push to achieve your goals sooner and have a safe cushion of money stored away for anything life throws at you. Of course, we are speaking financially. 

Even if you don’t achieve your stretch goal, you will be closer to your actual purpose, which is a reward in itself. 

All set to create and build that Emergency Fund now? Just follow the steps ahead, and you book your fixed deposit in three easy steps. 

  1. Login to the digibank app – if you don’t have the app, click here
  2. Tap ‘Open New Deposit’ & Select ‘Fixed Deposit’ or ‘Recurring Deposit’
  3. Choose tenure of 1 year for 6.25% interest – that’s it and you are done.
by Sagar Shah
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