‘Time, tide and COVID wait for none’ is the hardest lesson of the pandemic. The contagion has made us all realise what vulnerable lives we lead. As horror stories pour in of entire families falling sick, breadwinners losing their lives and savings getting fully wiped out by COVID, it may be time to take a hard look at your emergency corpus.
Wealth managers can never stress enough the need for a fund exclusively for emergencies. This would be apart from your insurance policies, pension plan, the funds earmarked for children’s education, the money being put away to buy a flat, etc.
The emergency corpus is sacrosanct — it needs to be just the right size, it has to be easily accessible, and it should never be touched unless absolutely necessary.
The basics first. Your emergency fund has to step in and keep you and your family fed, clothed and sheltered in the event of a sudden sickness, job loss or even severe pay cut. To build it, you first need to compute your average expenses for a month. Roopa Shankar, Director of wealth management firm Vithadwaitha Investments, thinks writing works best.
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“Mental estimates tend to be wrong, so we tell our clients to write down their monthly expenses,” Shankar told The Federal. “A pattern will emerge. The six-month average will give you the correct figure.”
The pandemic has changed the requirements, she agreed. While clients were earlier asked to build a corpus that covered six months of expenses, this has now risen sharply to 12, or even 24 months. Because nothing is for sure. Full recovery from COVID is said to take a notoriously long time, so it may impact your ability to work or run your business. There may be long-term treatments that your health policy may not cover.
If you face a pay cut or a job loss, it may be a while before you land a new one, leave alone one that pays on par with your earlier job. Also, as Shankar points out, the pay may remain the same but you may stop getting incremental income such as bonuses and performance-linked incentives (PLI). Hence, a corpus that keeps you and your family comfortable for up to 24 months is hardly a luxury.
For instance, if your monthly expense is ₹80,000, your wealth advisor may probably have recommended a ₹4.8 lakh emergency corpus. Now, with COVID-taught lessons, you may want to scale it up to ₹19.2 lakh.
Sundries matter, too
Shankar has a list of expenditure that should go into the fund. Apart from the basic food, clothes, rent, medical expenses and school/college fees, you need to factor in your loan liabilities. If you are sending some money to your parents or other aged relatives every month, you need to cover that, too.
Next, carefully consider what may seem non-essential on the surface, but may actually be essential. Is your swimming pool membership important for your wellbeing? Are you alright with your daughter forgoing her karate lessons? Also, give some thought to domestic help — you may require your maid/cook/driver even during a period of financial crunch. Your emergency kitty may need to cover their pay, too.
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Once you know how large your fund needs to be, you can start working on it immediately. Ideally, you should be allocating a portion of your savings every month to this corpus till it reaches the critical size. However, the COVID onslaught may require quicker action. So, you may consider pulling money out of existing investments and moving them to your emergency corpus for now.
For instance, if you are building a fund for your child’s post-grad education abroad, and said child is only 10, you can transfer some of that fund to the emergency corpus right away. Such arrangements, of course, call for a lot of discretion on your part.
Ease of reach
The emergency fund has to be parked where it is easily accessible. This straight away rules out assets like real estate, jewellery and even gold coins.
There are advisors who swear entirely by liquid funds — these are debt mutual funds that are relatively low-risk and let you withdraw your money in 24 hours. They offer higher returns than bank deposits, and the tax burden can be tempered with careful planning.
However, there are others who think it’s best to park 50-60% of the fund in a bank fixed deposit.
One wealth manager The Federal spoke to recommended splitting the corpus across multiple FDs. This way, if you need to ‘break’ one or two FDs, the rest will remain intact and your interest income will not be affected much, he said.
Shankar thinks it may be a good idea to get an FD linked to an ATM card, so that even your child can withdraw money, if push comes to shove.
Knowledge is key
Which brings us to the importance of information. For your fund to chip in during an emergency, it is imperative that your immediate family — and maybe even the first circle of friends — knows about it. Share deposit details and passwords. Tell them in precise terms how they can withdraw the money.
According to Vithadwaitha Investments’ Shankar, an emergency corpus is now a non-negotiable. About three decades ago, it was normal for a family struck by an emergency to move in with a relative for a while before it got back on its feet, she observed.
“Now, it’s not possible, comfort levels have changed,” she said. “So, it is essential that you be prepared to face such contingencies independently.”