Dipankar Jakharia
My neighbour Mrs. Merry has a habit of updating her passbook every week. The clerk in her branch let her bypass other customers every Monday morning. She took voluntary retirement from govt service eight years back, and since then running a Girls hostel successfully on the ground floor, and living on first floor with her dog Pricy. With no immediate liabilities and in her sixties, she takes great comfort in her fat bank balance. Believe me she is not the only one! Sometimes it almost astounds me to learn how much money a middle class citizen stock up in their saving bank account.
“What a waste!”
Hearing this my friend John asked “What do you mean?”
: You know like alcohol money has a bad habit!
: Please talk straight.......what do you want to say?
: It evaporates in thin air!
: Meaning?
: A loosely fit perfume bottle will evaporate in time! You should know how it keep it, moreover where to keep it!
: Yes I know, but how money will evaporate? And she’s keeping it in a bank. It is safe there, isn’t it?
Asked my nervous friend, again.
Money has an enemy! And it is an inherent one. It is called INFLATION!
So if the Inflation is at 8% and your bank is giving you 4% you are still going down at 4% . So in effect if you put Rs. 100/- in a savings account and after a year your actual value is
Principal : 100
Interest : +4
Inflation : -8
Value in reality 96 (After a year)
So keeping a large chunk of your money in a simple saving account is not a very ideal preposition. On a contrary it is loss making. Then why do you need a savings account for? Use this account to perk your money temporarily, before deciding on a better avenue to invest in. Also there is a thumb rule about how much one needs to keep in a savings account. The thumb rule says to Keep 3 to 6 months expenses in your saving account, but no more. And then you shall call it Emergency Fund. As life teaches you to expect the unexpected, this fund should be utilized for any emergency purpose. Say your refrigerator brakes down, or your maid’s husband is sick and you want to help, then dig in to this coffer. But refrain from using this fund from paying regular expenses like children’s school fees or groceries.
Tips to build your Emergency Fund:
• Keep aside 3 to 6 months expenses as Emergency fund
• If your income is regular and secure, then 3 months is good enough
• If your income is not regular and also if you have more liabilities then increase the fund value to 6 months expenses.
In real Emergencies, cash is king. Therefore keep 1/3 of the fund value as cash in your home in a secured place earmarking it as E.F. and tell responsible members of your family about it and the purpose. You don’t need a separate bank account for E.F. Say your household expenses is Rs. 10,000/- and the required minimum balance in your account is 5,000/-, then your balance in your saving account should be Rs. 25,000/- at any given time and cash in home is Rs. 10,000/-. If your situation is 6 months expenses then adjust accordingly. The concept of having a thin savings account is for better utilization of your money for meaningful return on your investments.
The writer is a Guwahati based Financial Planner. Send him your email at dipankar.jakharia@gmail.com or call 09954089888
