Setting aside a portion of your income every month could be helpful to meet financial needs during any unforeseen situations. Such savings could provide a financial cushion for several situations, like medical emergencies, home repair, or any other unplanned large expenses. Generally known as rainy day funds, these savings for unwanted situations could offer a financial buffer to meet expenses without opting for loans or depleting your existing investments.
Financial advisors often advise investing a portion of your monthly income for financial security during contingencies. Rainy-day funds are meant for meeting expenses arising out of unexpected situations like health issues or job loss.
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Let's take a look at how to build a rainy day fund in simple steps and regular investments every month.
How To Build Rainy Day Fund
Here are a few effective ways to build your rainy day fund:
1. Prepare a list of unexpected expenses that may arise in the future. This will help to finalise an estimated amount for your rainy day fund.
2. Keep the amount in a separate savings account or investment instruments.
3. Choose secure investment options that offer high liquidity and decent returns.
4. Choose the investment instruments as per your financial goals or the amount you need.
5. Automate your contributions to these investments. Also, transfer a small amount every month to your savings account, meant for a rainy day fund.
How To Build Rainy Day Fund With Investment Of Rs 1,000 To Rs 10,000 Per Month
You don't have to keep aside a large amount to start a rainy day fund. Even with a modest income, saving as little as Rs 1,000 to 10,000 per month, you can create a solid fund over time. A suitable investment could be a mutual fund Systematic Investment Plan (SIP).
Before we dive into the returns the SIP may provide, let's get an idea of what SIP is and how it usually works.
While SIPs carry a higher risk compared to traditional investment options, they also offer higher returns over time, especially if the market performs well.
Here's how much return you may expect if you save between Rs 1,000 and Rs 10,000 in SIPs.
SIP Calculations Under Different Scenarios
Investment Tenure: 5 years
Interest Rate Per Annum (Estimated): 9%
Invest Rs 1,000
If you invest Rs 1,000 per month, you will build a basic emergency fund of around Rs 96,200 after 5 years, including Rs 36,200 interest at the end of the tenure. This is a good start to cover minor medical or household expenses.
Invest Rs 5,000
Investing Rs 5,000 per month can grow your money to approximately Rs 4.81 lakh, earning you around Rs 1.81 lakh in returns.
Invest Rs 10,000
If you invest Rs 10,000 per month in SIPs, your funds can grow to Rs 9.62 lakh, giving you Rs 3.62 lakh in returns.
Even monthly investments of Rs 2,000, Rs 3,000, or Rs 4,000 can grow to an amount between Rs 1.9 lakh and Rs 3.8 lakh over 5 years at a 9% return per annum. Similarly, saving Rs 6,000 to Rs 9,000 every month can build a fund of around Rs 5.7 lakh to Rs 8.6 lakh in the same period.
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