It was July 26, 2005. The afternoon rain had started its frenzy in the city of Mumbai.
The rain continued the whole night and well into the next day.
People were stranded in offices, in trains, in cars and buses. “The whole night, I was sitting in the train, without food to eat, water to drink and no access to washroom facilities to relieve myself,” was the experience of many.
The next day had its own set of problems. One of the difficulties faced by many was the lack of cash. They had balances in bank accounts but not much at home.
“I always thought, in the case of emergency, I will go across the street and withdraw cash from the ATM,” said a friend.
Unfortunately, in some parts of low-lying suburban Mumbai, ATMs were submerged in water.
We all end up facing situations in life or sometimes have been witness to situations that are not only unplanned but also unexpected.
These could be in form of natural or man-made calamities, e.g. torrential rain, tsunami, earthquakes, floods, terrorist attacks or geopolitical situations. These impact the entire region.
There could be some situations which impact a particular individual or a family e.g. loss of income due to job loss, slowdown in the economy, health condition of bread-winner, and the like. At such times, there could be loss of income or an unexpected rise in expenses or both.
In most situations, there is no formal insurance available and hence, it is prudent to keep aside some funds to meet these vagaries of life.
My CEO
Most of us who are salaried have a CEO for our organisation. Ever company in whose shares we have invested has a CEO.
As individuals, we have no control over these CEOs even though they directly or indirectly impact our lives.
However, there is one CEO over whom we do have control, and that is our Contingencies and Emergencies Options (CEO). These are funds kept aside to help us deal with adversities in times of stress. We all have heard the saying ‘a stitch in time saves nine.’
Whether it saves nine or ten, I don’t know, but if there are funds kept aside for contingencies and emergencies, that would certainly enhance our ability to deal with adversity.
How much? Where?
During such times, there will be emotional trauma and financial stress. If there are adequately planned contingencies and emergencies options in place, then our emotional trauma will dilute significantly.
Usually, most financial planners recommend we keep aside funds equivalent to about three months’ mandatory expenses for emergencies. Three months, or 90 days, is sufficient time to come to terms with any kind of trauma.
How long-lasting the scare from trauma is, is dependent on each individual’s frame of mind but in most instances, within about 90 days, life starts limping back to normalcy.
Advice to elderly who are dependent on investments and pension could be to keep aside about 180 days’ reserve. In some extreme cases, advice is also to set aside provision for 220/240 days.
After deciding on how much to keep, the next question that comes to mind is where to keep these funds. Here, the recommendation is to keep funds equivalent to about one week’s expenses in the form of cash at home.
Even today, in most parts of the country, vegetable vendors, milkmen and their ilk prefer cash; more so, if it is a calamity-struck area. The remaining funds may be parked in a savings bank account. This account should be linked to a fixed deposit.
Returns on investment
‘What kind of returns should I expect on these funds?’ was a question posed to me in an investor awareness programme.
Please do not think of returns, tax benefit etc. on funds set aside for emergencies. The only focus should be to ensure a portion of it should be available any time and the rest should be accessible at the earliest with the least effort.
Prepare, don’t predict
Preparation is about taking action. Prediction, a lot many times, is manifestation of inner fears due to hearsay, gossip and rumours.
We are witnessing the pandemic of COVID-19. It is difficult to predict the future but at our end, we can always take small steps to ensure that if there is a slowdown, loss or reduction in income, there is sufficient financial armour to meet our routine expenses for a while.
(The writer is a financial planner and author of the Yogic Wealth)
