Having a rainy day fund

The entire world is facing an unprecedented challenge. Companies are shutting down and people are being let off with no other choice. 2020 is turning out to be a huge learning curve for humans. Along with the pandemic, comes the economic responsibility, people need money to buy groceries, fulfill other needs and support their families. So I thought I’d write about an easy and effective way you can maintain a rainy day fund for urgent cash needs.

There are tens of methods you can choose to start saving. Today I’ll stick with an interesting one that I’m very fond of - Recurring deposits. Now what is it and how does it work? Most of you might be aware of the term, but if not:

A recurring deposit is a special kind of term deposit offered by banks which help people with regular incomes to deposit a fixed amount every month into their recurring deposit account and earn interest at the rate applicable to fixed deposits.

Now what I do is every year I start a recurring deposit scheme with my bank, set aside a small portion from my paycheck and let it auto debit from my account. This keeps on growing every month, earning interest income.

And here comes the interesting part. Banks allow you to take loan against your deposits and this can be availed when you face liquidity issues. Since the deposit acts as collateral, you could get upto 80% of your money as loan within a few hours(or even minutes) upon request through any of the online channels of your bank(Netbanking or Mobile banking). You use the money for your urgent needs and as soon as you’re financially better after a few weeks/months, you pay back the loan and this way your capital remains safe. The interest rates for loan against deposits are very low as compared to personal loans and buying on credit.

If you directly withdraw the required amount from your savings account, you won’t bother to refill it for your next need. Instead by choosing to go for a cheap loan, you have the capital preserved, you get to meet your needs as well as the money grows.

Many would argue that the interest earned is very low while keeping money in deposits with banks. In fact, with inflation your effective return can be zero as well! I agree with them, the interest money you earn is indeed very less, but it’s no match to the relief you get knowing you have a safe fund accessible at the touch of a button. And I guess that’s what matters. Investing should remain simple and stupid.

Let me know what you think about this or any other easy ways you follow for saving.

Happy investing folks!