Having one big savings fund in the form of a savings acocunt for all your needs may seem like an easy approach, but it often leads to dipping into your savings for one need, while another important need goes unmet. It is better to have separate targeted saving funds for different needs. This helps ensure your key needs and life goals are achieved on time.
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 so you have enough when you need to make the purchase. 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 save, the less you need to put aside to accumulate several crores for your retirement.
Plan for major life goals
One of the benefits of a saving account is that you can make varies deposits, each for a different life goal – like buying a home, starting a business, or taking an international holiday. Keeping your money for different life goals in separate deposits helps you earn a better interest rate, which helps you 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 make sure each fund has enough to meet your target amounts. You may need to increase monthly amounts, 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. Make adjustments quickly if you get behind to get back on track right away. With time and discipline, you will build substantial savings to fund all your key life priorities.
