Break Glass only in case of Emergency
Emergency Fund – So that you can leap forth confidently.
Today I commented on a tweet about what is “capable” in reaction to “People become DIY not because they are capable, but they want to avoid fees “. That triggered me, not to sound disrespecting to anyone but really how do you define capable – is it a professional qualification (CFP), it is number of clients you serve or impeccable trust you have in someone.
Well whatever be the case I know investment and financial literacy is a never-ending journey. It can also be very tough when you start on this path to avoid foolish mistakes or avoid temptation (remember the unbelievable tip you friend gave on a stock). However, with hindsight wisdom I can also say that a few things if done well help you throughout your life – Like an Emergency Fund.
Cognitively we all realise that having cash to access during an emergency is wise thing, but seldom do we practice what is right. We do not put the effort to create a dedicated emergency fund.
Anecdotally many a times the cost of servicing a medical emergency or an event, lands one in debt and catches people unaware.
Emergency will happen to my Neighbour
Life is unpredictable and all of us might have to face an emergency. Even if you keep large sums of money n your savings account or have a good credit limit on your credit card, you still need a separate emergency fund. Borrowing to cover an exigency could be the start of your financial woes and difficult to extricate oneself out of the same.
“ A friend’s dad met with a heart ailment and was wheeled into a specialty hospital in Chennai , the doctors wheel out his dad and tell him that they need to operate on him soon and it will cost Rs X. This is 20 years ago, and it was a huge sum. My friend charged his credit card for the amount, little realizing that it could be the start of the debt trap ( about 42% p.a). A few of us got together and pooled the money so that he could pay of the credit card bill and pay us off in installments or when he could figure out the right borrowing instrument. The purpose of narrating this incident was twofold – one that my friend was caught unaware and two in such tricky situations you are not mentally present to take the right decision. “
An emergency fund would have done the trick.
Here are a few steps to make this a reality
1. A simple savings account or liquid / overnight fund (mutual funds) is a good option . your primary concern is that this money is accessible in a day not instantaneously. This is liquid so not invested in any risky instrument like equity or bonds so mostly overnight funds or liquid cash plans are good options for individuals. Ideal if it is linked to your savings bank account . https://www.utimf.com/mutual-fund-products/liquid-funds/. What we have also done at UTI is created a wrapper called U save which is linked to the liquid cash plan and offers a feature of insta-redemption up to Rs 50,000 per day.
2. Ensure that the account where you park this money pays you back . Today a lot of savings bank account offer a minimum yield however have minimum cash balances, fees etc DO your due diligence in comparing products before choosing the instrument .
3. Put away 3- 6 months of expenses. Now this is a thumb rule which has to be contextually relevant. If you are single and no dependents, then a few months would be okay. If you have a spouse who is working then again, the same logic, however if you are chief wage earner and have dependents then maybe 8 months to a year is a good plan to cover.
4. I have just started working or I do not have that kind of savings. Do not worry. Here is where you automate your savings and set up a SIP (systematic investment plan (SIP) or Systematic transfer plan (STP) every month into the instrument till the time you reach the target amount.
5. Access only in case of an emergency. Running out of cash to buy a gift on someone’s big day, funding for a trip are not the emergencies we are talking about. Accidents, hospitalization, losing a job – you get the drift. Right!!
6. Refill and not fill it , forget it and shut it. Life is crazy and you might have a bad patch repeatedly so do not think it will not happen again. If you use the fund , keep replenishing it and keeping it contextual to your living expenses and lifestyle upgradation.
This might give you the bragging rights of having made a killing or doing something novel. I am pretty sure that it will give you peace of mind and confidence that you have a stash stored away in case of an emergency, thereby giving you the chance to take your risks.
So what do you think ? Are you to ready to follow these steps or are following these steps , would be happy to know your comments.