Anupam Roongta
This is the story of Chintamani, a common man with a simple dream of living happily with his wife and two children. His goals are buying a house and being a proud owner of a luxury car one day. He was an engineer by profession and had been working in an MNC in Bengaluru for the past 12 years. His income was good enough to maintain a decent living standard.
Being aware of the benefits of long-term investments, he had deployed reasonable amounts in stocks, mutual funds and fixed deposits (FDs). It is safe to say that he earned, saved and invested well. For fulfilling a part of his dream, he recently purchased a house. He made a down payment of Rs 30 lakh. Given his financial situation, he was comfortable with paying an EMI of Rs 40,000.
He also had to pay the house rent till 2022 (he would not get the possession of the house he bought before that). All was going well for him. He was well settled.
The pandemic tsunami
One fine day towards the end of April this year, he received an email from his company and his eyes remained wide open. He was fired!
His company was firing people en masse, due to the financial impact of the COVID-19 pandemic. He panicked and immediately calculated his fixed expenses, which were almost Rs 1.5 lakh a month. After taking a long breath, he decided to start job hunting immediately. But destiny had more bad news in store for him. He was diagnosed with COVID himself.
The sad part was that he had not taken a standalone medical policy, as his company covered him well. Since he lost his job, there was no medical cover now. The estimated expenditure for the COVID treatment was Rs 12 lakh. Suddenly, his world collapsed and the majority of his savings had to be withdrawn. He was financially sound and had made good investments earlier. Why did he face this crisis then?
The way out of the financial crisis
Learning #1: Always take a standalone health insurance policy. Don’t depend on your company, for the following two reasons:
-For a situation wherein you lose your job or you take a sabbatical.
-When you retire, it would not be easy to get a new policy. Insurance companies want to insure a healthy life, which is rare in this age. Moreover, the chances of medical issues are higher in old-age (imagine not having a medical cover in your retirement life).
Learning #2: Create an emergency fund
Given his healthy lifestyle and good immunity, Chintamani recovered fast and was back to normal in a month.
He took note of his financial condition:
-FDs were all withdrawn.
-Almost all mutual funds and stocks were sold.
-He was on the verge of selling his house. (But it is emotionally challenging to sell your dream home. Plus, it was tough to find a buyer in the given economic conditions).
He was now left with only two months of funds to meet his household expenses. His efforts at finding a job continued and he was even more desperate now. Luckily, he got hired. He again started working towards creating his financial assets.
One day, he was talking to his friend, Ajay who is a financial advisor. Ajay introduced him to the concept of emergency funds. Chintamani had no clue about this concept. Ajay explained to him.
What are Emergency Funds?
A certain amount kept aside for emergencies or unplanned expenses.
How much money is enough?
There is no right answer, but usually anywhere between 6-12 months’ expenses should be kept aside. For example, if Chintamani spends Rs 1.5 lakh a month, he should keep aside Rs 15 lakh to cover ten months’ expenses.
Where to keep or invest these funds?
First of all, think about where not to keep them. Never keep them in your savings account, else you will end-up spending it on frivolous things. You should invest it in liquid funds (a type of Debt Mutual Funds) or in fixed deposits. Having learnt his lesson, Chintamani started creating his emergency fund.
As per his friend’s recommendations, he made a list of things he could take care of with this fund.
-Household expenses, in case of job-loss.
-Tax saving investments (Rs 1.5 lakh which he invests every year to save tax).
-Paying taxes while filing income tax returns.
-Paying insurance premiums, including life, health, and vehicle.
-Opportunities for investing in the stock market, like the one we had in March and April 2020.
-Unplanned luxury expenses like vacations, furniture, renovation, electronic appliances, etc.
(The writer is a SEBI Registered Research Analyst at www.anupamroongta.com)
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