Prepare for the worst

Financial planning is about "Hoping for the Best but Preparing for the worst" .

 This is a critical rule that should be one of YOUR top 5 finance planning rules. Nothing has shown this more than the covid 19 pandemic and the impact it has on our financial lives. 

Many people lost jobs or getting reduced salaries or suddenly had huge costs due to medical bills.. I have seen people hugely stressed on finance when they should have been focussed on settling their private lives. 

The ONE way to help protect oneself is to have ONE year of emergency funds. 

Take the example of the pandemic .. if one had the emergency fund it totally released a lot of pressure on getting time to search for a second job... cos it takes time in such a situation. 

Lots of financial planners talk about a six months of emergency fund . But post this pandemic i would think that it makes sense to double this... it gives you much more downside protection. 

Invest or keep this money in a liquid fund or a fixed deposit.  

Downside protection makes sense.. simplefinancialsense. 

Liquid funds

It is clear ( I hope!) that we need to park funds for an emergency. This fund is required to ensure that during an emergency we are not running around to get money released and are focusing on resolving the emergency.

However, keeping the money in bank accounts will only get you a 4% ( or 6% at kotak) return. Definitely not inflation beating returns.

Also on this return you need to pay tax @ 30% which brings the return to 2.8% .

So , we need to try and optimize the return in this scenario and the best way to try and do this is to use the option of liquid funds.

Liquid funds are funds which are used to  fund short term requirements of big corporates and have given returns of around 8% over the last year. Also as the name suggests you can easily take out the money... Because it is short term.

I suggest that this is a good model and something all should look to do.

It's simplefinancialsense.

Financial Planning Importance- Real life case study

I had quite an experience today-- met with an aquantaince who is going through a bad time in life... Health, job, family-- All in dire straits.

What does not help is that he does not have a strong financial kitty available with him to tide him through these tough times.

With no regular income coming in, and no job forseeable in the future, his financials are going to go completely down the drain

He needs to pay multiple things which he has bought on debt.

1. House EMI of 30K
2. Car EMI of 20K

With him not being able to pay the EMI's these will get sold off by the financial institutions.

With him having lost his job-- even his medical Insurance coverage is no longer applicable ( wonder why we assume that only company Health Insurance is enough).

What lessons does this experience give us.

1. Ensure your money is not stuck up in illiquid assets only-- eg house-- it will take a long time to sell of the house. Have a BALANCED portfolio
2. Ensure you have sufficient Emergency funds available--AT LEAST 6 MONTHS!!
3. Have a medical insurance coverage beyond the company one.
4. Really Evaluate investment income or passive income--- in this it could have gotten him out of this hole.

A really tough experience yesterday--- but hopefully he will get out of the issues he is faced with and come out on top.

Ensure you implement a plan immediately!



Happy Investing!

Comments most welcome..

Creating And Managing An Emergency Fund

Theres multiple theories and practices propogated by the pundits of finance and wealth as to what should be the amount one should have in an "emergency fund".

Formulaes range from a 3 months of buffer to a 6 months of buffer. Some think that this should be calculated by using historical averages with creative variations built in. In effect it leaves one quite confused as to how we should be looking at this no.

As i always say, life is about simplification-- the more simplified is the understanding , the easier it is to manage and execute. So lets go back to basics.

An Emergency fund is the amount of money that one should be able to withdraw immediately in any Emergency situation to tide over the Crisis. There are two key words which will help define the amount of money that you need to keep aside.
1. Crisis
2. Immediately ( whithin 24 hrs)
So you must first define or try to define these as accurately as possible for yourself. One must be honest while answering these questions.

Crisis can mean multiple things--- loss of job, hospitalization, urgent travel, death and related costs, mortgage payments. One needs to understand these requirements and costs of these requirements in ones own context. An example is that if you are covered by medical insurance you may not take those costs into account and if you are not ( get one fast!) then take those costs.
so if we were to make a simple calculation
A= monthly expenses for rent, food, entertainment, transportation, telephones, any open mortgages, electricity-- * basically all the monthly expenditures to run your household
B= Annual/ monthly premiums that need to get paid for insurance coverage, motor insurance, etc ( these usually get missed out)
C= Medical/ travel expenses that may come up ( just do a quick check of the hospitals near you if you dont have medical coverage)
Thus the Emergency fund ( E) will be calculated as
E= 3A+ B+C

Simple enough? if you are still worried you can create a safety factor of 30% on this to calculate the Safe Emergency fund-- (SE)
SE= 1.3X E


While today the availability of credit cards is like a gift from heaven-- but i think at the max the credit card should be used for the 30% safety factor and the basic emergency fund should be in cash or cash equivalents only.
A lot of the older generation Indians-- those who did not believe by the credit card have more than the amount of funds that they need readily available in cash or liquid funds ( in bank or in the house-- remember the tijori?)
The newever generation usually live by the day-- enjoying in the now-- and do not have these funds planned.
This calculation is important for both types of people-- the have mores and the have less. The have mores because they are wasting an opportunity to get higher returns and the Have lesses the high risk that they are living in now.

Well understood is half begun--- So make some good use of the Emergency fund concept..!!
Happy investing..!