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The importance of making different pots of savings


Having one big savings fund in the form of a savings account for all your needs may seem easy, but it often leads to dipping into your savings for one condition while another important market goes unmet. It is better to have separate targeted saving funds for different needs. This helps ensure your key requirements and life goals are achieved on time.

The three pots saving methods will get you to your goal - Your Money & Your Life

An emergency fund comes first.

The top priority should be building an emergency fund with enough to cover 3-6 months of essential expenses like food, housing, and transportation in case of job loss or medical emergencies. Keep this fund in a bank account so you can withdraw money immediately without penalty. Only dip into this fund for real financial emergencies.

Save for short-term goals.

Have a separate fund for short-term goals in the next 1-3 years, like a vacation, home appliances, or a new vehicle down payment. Keep saving money each month in this fund to have enough when purchasing. Make sure not to underestimate the total cost of ownership if buying an asset.

Fund your child’s education.

Education costs in India have risen exponentially in recent decades. If you have children, start saving early for their college education in a dedicated education fund. Considering education inflation, you may need upwards of ₹5-10 lakh per year of college to fund living expenses, tuition, and other costs for engineering or medical degrees. The earlier you start saving, the less you need to put away each month.

Save for retirement to build wealth.

Retirement funding is one of the keys to building wealth over the long run. Invest in equity mutual funds, stocks, or real estate over 20-40 years to benefit from compounded returns. Aim to save at least ₹50,000-1 lakh per year for retirement from an early age. The longer you hold, the less you must put aside to accumulate several crores for retirement.

Plan for major life goals

One of the benefits of a savings account is that you can make various deposits, each for a different life goal – like buying a home, starting a business, or taking an international holiday. Keeping your money for other life goals in separate deposits helps you earn a better interest rate, which enables you to reach your goals sooner.

Review and rebalance your funds.

Review the progress of all your funds at least once a quarter. Rebalance as needed to ensure each fund has enough to meet your target amounts. You may need to increase monthly payments, add lump sum top-ups, or re-focus your priorities. Having separate targeted funds gives you financial control and flexibility to adapt to life’s changes.

The key to success with separate targeted savings funds is discipline. Automate as much as possible so you pay yourself first before money is spent on discretionary items each month. Track your progress to stay on schedule to achieve each priority need and life goal. Adjust quickly if you get behind to get back on track immediately. With time and discipline, you will build substantial savings to fund all your key life priorities.

Geneva A. Crawford
Twitter nerd. Coffee junkie. Prone to fits of apathy. Professional beer geek. Spent several years buying and selling magma in Miami, FL. Spent a year lecturing about psoriasis in Las Vegas, NV. Managed a small team writing about circus clowns in Las Vegas, NV. Garnered an industry award while writing about lint in the financial sector. Spoke at an international conference about getting my feet wet with dust in Libya. Spoke at an international conference about researching rocking horses in Bethesda, MD.