Investing Handbook for Indians: Chapter 2
Emergency planning. Backups are essential.
Welcome to chapter 2 of this series. Read Chapter 1, if you haven’t already.
I am really excited to have you here, again!
We will be covering one very crucial aspect that is often forgotten once you get into the habit of investing. Planning for the unknown.
There are a multitude of situations which will call for some extra cash or a lot of extra cash. You’re having a good day and in the next moment you’re not. The nature or timeline of such events are highly unpredictable, thus, making it extremely hard to stay prepared.
Understanding Emergency
You are a salaried employee. You would like to go back to school to get a masters degree. You do not have someone to support you financially during this tenure, so you start planning and saving on a fund that keeps you afloat during those months/years when you will be eroding, not earning. To enable a smooth college journey you decide to start saving on the side.
This is called Goal Based Saving or Goal Based Investing.
You messed up this interview you have been preparing for months now. You’re not in a great mood and this is one of the worst things that has happened to you. Maybe it tops the list. It’s your worst experience. Right there will land the ALPHA of worst experiences. You get hit by a bus. Let’s take a less gory image. You have a nervous breakdown on your way home, drop unconscious and hurt yourself(break a bone maybe…). How’s that hospital bill coming?
An Emergency is not a goal. It is something that crashes right into your otherwise merry day, throws off that nice bagel you were having, sweeps you off the ground & dumps you nowhere.
I do not mean to scare you with such images but I do.
Be Scared not Intimidated.
When scared, we are more vigilant. We put in extra effort to make sure the system is well oiled, hence are better prepared. In context of D-days, your philosophy should be the exact opposite of investing in equities.
Go wildly conservative!
It could be anything from losing your only source of income, the markets crashing, falling sick for a long period, an unplanned essential purchase to huge medical expenses and what not.
Tsunamis and earthquakes don’t book an appointment on the Meteorological Department’s calendar. Yet, they stay prepared for all known & possible situations. Your army need not stand in formation 24x7 but you should have a troupe of well trained officers to hold fort when called for. Same is what we should be doing for financial emergencies. We need to gather a bunch of trainer officers to fight our money crisis battles.
Have you guessed it yet?
Let me spell it out. Start building an Emergency Fund.
Divide and Conquer. It is always better to have multiple boxes rather than a single one. Here’s how I do it. You can divide them into more categories based on your lifestyle, commitments and liabilities.
(FYI: I have come up with the nomenclature, not the official terms. 😜)
1. The Hiccup
The word itself gives you an idea of the magnitude.
Broke my phone. A new one will cost somewhere between 10–20k.
There is a family emergency. Last minute air tickets will cost around 12–15k. Your friend is getting married or you plan an impromptu trip with your college buds. There goes some 20k.
2k or 20k, these are unplanned expenses. For those already living on a tight budget, tickets like these can scar your finances for months at a stretch.
The hiccup fund to our rescue. I prefer keeping some 30k aside.
Touch it only for real emergencies.
‘Need cash to buy something on sale’ is not a cause to touch this fund. You need to employ self discipline here. You might think you will replenish it with your next paycheck. Maybe you will. Maybe you won’t. What you will definitely do is put this fun at risk. Avoid falling prey to this story.
2. The ER call
Medical emergencies do the maximum damage. In addition to getting life and medical insurance, it is a safe practice to keep some amount aside for hospital expenses. Based on where you are located, your medical history, age etc. the amount will vary. There is no upper cap but there is definitely a lower cap you should self-tax. Especially if you are someone who does not have regular cash flow, keeping some 50k aside is always wise.
Those are my personal numbers. As I said earlier, it will vary person to person.
3. The Rollercoaster
Here’s the big one. There can be a varied range of calamities. The worst part is they often arrive in clusters. My friend lost his job and that very month both his parents had to be hospitalized(victims to 1st wave of COVID-19). Post that they were bedridden for months. Keeping all the physical and mental exertions aside, take a moment and evaluate the financial trauma he must have gone through.
I had been stalling my emergency fund accumulation for months because I could the not see the reality of it. I did not want to imagine a situation where I am losing money. It was this incident that made me realize the urgency of it. Keeping a minimum of 6months expenses is the least we all should do. Safe side, it should be a year or even 2 years. Take some time and evaluate the breadth of your financial cover. Knowing that will help you better estimate your thriving capacity.
Stay mindful of these things
- Build your emergency fund after you clear off all debts.
- Build your emergency fund before you fuel your wealth creation and retirement instruments. At least, go parallel.
- Decide what corpus is your comfort zone. You may be comfortable with a 3-6months retainer. Some of you might need a year.
In my opinion, keeping 1year’s expenses handy is a fairly good amount. - Define the emergency and save accordingly.
- Your emergency fund should be liquid in nature.
- Get insurance today!!! (Make this point 1)
Make hay before the sun shines. A stitch in time saved nine.
You are playing the long game here. The key to wealth creation is consistency. The smallest of breaks will cost you lakhs/millions and become major drain pipes to your otherwise massive corpus.
This is no goodbye. Move on to Chapter 3 next. Let the journey continue.
Where can you find me:
- Twitter: https://twitter.com/Pronomita_Dey
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- Write to me: dey.pronomita@gmail.com
