Imagine a scenario, where it’s the Diwali holidays, and you have planned a vacation with your family in Goa. But rather than take a flight or the train, you decide to drive down. The journey might be longer, but with your family in tow, it won’t be short of enjoyment and entertainment. Preparations are in full gear and a couple of weeks before your intended trip, your car breaks down due to engine trouble. The mechanic tells you that the engine needs to be replaced. It’s not a big problem and will not derail your vacation plans, provided you replace the engine, an unexpected expense that you will need to bear. In fact, these kinds of unexpected expenses could arise again in the future too. So what can you do to prepare for these costs so that it won’t hurt your monthly budget?
You can by setting aside a reserved fund especially for the rainy day, which is specifically designed to cater to these types of unexpected expenses. This article will provide more colour into the meaning of a fund that you can set aside for the rainy day and the various savings strategies that you could consider.
What is a fund reserved for the rainy day?
A fund reserved for rainy day, is a fund that you set aside for certain expenses that are not regular but can occur frequently over a length of time. This is not a fund that you set aside for emergencies (that is different), but for expenses that are not as critical. For instance, setting aside some funds for the replacement of certain white goods or home appliances, other home repairs, timely health check-ups and doctor visits, car maintenance and repairs, expenses incurred for funding your hobbies, and so on are some examples. As you can see, these are small-ticket expenses, unlike emergencies which entail bigger costs.
Where should one keep such funds?
Just keeping aside funds for a rainy day may not be enough; you would want those funds to work for you. You can do that by investing in mutual funds.
Mutual funds come in all shapes and sizes with each mutual fund house offering of schemes that cater to different investment objectives across asset classes such as equity, debt, gold, silver and so on. It would make sense to consider investing in a mutual fund that is typically short-term in nature, like liquid funds, especially if you anticipate the need for quick access to your funds. Liquid funds are known for their liquidity and have zero or minimal exit loads*, ensuring that you can withdraw your money with ease whenever the need arises.
How much money to reserve for your rainy days?
There is no surefire answer to this because it depends upon the habits and lifestyle of every individual and the family members, he or she is responsible for. This can vary from person to person and household to household because what seems fine for one family may not be enough for another. One way to determine how much you might have to set aside for such situations, is to look at your history of expenses. This will give you a rough idea of the kind of unexpected expenses that have occurred in the past and accordingly, you can provide for them in the future.
Strategies for saving for the rainy days
Here are some savings strategies that you could consider:
Figure out your budget:
Unless you get a grip on your monthly expenditure, figuring out the amount required for rainy day can get tedious. Therefore, the first step is to chalk out your monthly budget. Set aside your regular monthly bills and other regular expenses. This will give you a fair idea of how much is left with you to save. One popular strategy that is often suggested is the 50/30/20 budgeting method, wherein 50% of your income goes towards important items such as food and other bills, while 20% goes towards savings, and this includes your reserved amount for rainy day.
Have an idea of future expenses:
While you can easily budget for your regular expenses, the same can’t always be said for unexpected expenses. And yet many of them might have occurred in the past, and so there’s no harm in setting aside a reserved fund for these rainy days or you might be aware of some unavoidable expenses that you must incur in the coming months, which are one-time but still important for the smooth functioning of your household. In such cases, it makes sense to anticipate expenses and determine the quantum of your fund accordingly.
To conclude…
Having a reserved fund for a rainy day can help reduce the stress of incurring unexpected expenses. These expenses aren’t for emergencies (such as hospitalisation and other big-ticket expenses), and yet incurring them can be a pain especially if you haven’t set aside some funds for them. In such circumstances, carving out a reserved fund for rainy days from your savings can help you plan better and ensure you have enough funds as and when these expenses rear their heads in the future.
*Exit load as a % of the redemption process for less than 1 days is 0.0070%, between 1-2 days is 0.0065%, between 2-3 days is 0.0060%, between 3-4 days is 0.0055%, between 4-5 days is 0.0050%, between 5-6 days is 0.0045%, and for more than 6 days, it 0.0000%
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
