Being thankful for what we have is one of the most beautiful feelings. But we often take this positivity too far. Very recently, I was talking to a friend about getting our residential complex insured against Fire. The friend dismissed my concerns saying that I am fretting for no reason and even her building is not insured. At the end of it, I felt like the pessimist in the argument, over-worrying as if hell is just waiting to break on us.
That evening, I read about fire in this high-profile high-rise and immediately called up my friend. It was my turn to make even. Well, not really. The friend conceded to my concern. She said that had it not been for our little chat, she would have brushed aside this news. But not now. She is going to press for fire safety & insurance to be followed to the T in her building.
Great! I thought as I hung up the phone and started reading about why we overlook Contingency Planning. I came across this interesting interview of Author Robert Meyer of the book The Ostrich Paradox – Why we underprepare for Disasters. He called optimism pretty dangerous – “excessive optimism is probably the most damaging one. The idea that triggers action is worry or fear over something bad happening to us, and if it never hits the radar screen, we’re not going to prepare for it. And so the more we ignore worst case scenarios, the more we think that bad things are things that happen to other people & not to us, the less able we are to prepare’’. (Read the full interview here: http://wwno.org/post/why-arent-humans-better-prepared-natural-disasters)
True said the author. We always assume that a calamity won’t hit us. If there’s fire, it would be in another building. If there’s theft, it would be in neighbor’s. If there’s accident, it would be another guy on the road, not us. Due to this, we never equip ourselves financially for the emergencies. However, there won’t be a sane financial plan, unless it accounts for an Emergency Fund.
What is an Emergency Fund?
An Emergency Fund is the pool of money that we keep aside for unannounced large expenses so that we don’t have to compromise on living expenses. Emergency could knock in any form like loss of job, major house repair, sudden ailment in family, unexpected travel. The fund should be easily accessible almost like cash since you may not have the time to access investments.
The fund should be 3 to 6 months of your monthly running expenses. For example, if your monthly expenditure is Rs. 1 lac, then Emergency fund should be between Rs. 3 to 6 lacs. Having said this, it is not easy to set aside a large sum just like that. It requires a bit of planning.
How should you create an Emergency fund?
To create an Emergency Fund, you have to do some math. A quick step by step will help here.
- Chart your monthly income and expenses: This must include the essentials like rent, fees etc. plus other discretionary expenditures like shopping, movie, eating out.
- Set your amount for the Fund:Consider the total of all essentials in a month. That total will give you a sense of how much you need to keep afloat in case of any emergency.
- Work out a Saving Plan: To accumulate a large sum, you need to work out a strategy. Evaluate how much is ok to keep aside every month and how long you need to keep saving to achieve the set amount.
- Put Emergency Fund in accessible place: The money should be available even at mid night if required. So you can partly keep it in cash, partly in a bank and some in maybe a liquid fund (more on Liquid Fund later).
- Stay on Track: You may have a festive month or new (school) session month which may prevent putting money aside but ensure that you are back to saving from next month on. Discipline is key in securing yourself.
I am doing Emergency Fund building for myself and can vouch for the peace of mind I have had lately. After all, it’s one life & those gloomy skies are better off at bay.
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A few years back, a very dear friend had fondly named her red car – ‘Ms. Polo Pandey’. Her love for the car was phenomenal. It wasn’t just her. Everyone loves their wheels, almost as if their dreams are made of just cars.
Times have changed for many of us. We are wiser with age and experience. Habits have changed so much. The millennial wave has caught up, and we are talking experiences more than possessions. We are trading big purchases in favor of Living-Your-Now. A car too, is a hefty buy that can rob bank balance very easily – and one of the reasons, millennials are not big fans of owning a car.
Momeys, whether you think the millennial way or not, but there’s serious thinking required before buying a car. Living in a metropolis (I live in Mumbai), the thrill of driving one’s car can easily give way to backaches and headaches. These are a few things I remind myself, every time I have pangs to get behind some big wheels.
- It is a depreciating asset: A car is a consumable and the minute you have driven it out of the showroom, its value has depreciated. No matter how well maintained is the car, it loses value rapidly. So, don’t bank a lot on the resale value.
- Expensive financing:Car loans are expensive unsecured loans, and they don’t get any tax rebates either. A hefty EMI can be a real burden. If you are in a situation that driving your car is the only option for your mobility, then keep your loans to least possible. You could opt for a smaller car and pay up maximum available cash as down payment.
- Cabs are convenient:For occasional travelling, consider cabs. I have done the math for myself and found that using cabs for all my travel will cost me around Rs. 10000 per month, which is still lower than the EMI I would pay.
- Servicing & Maintenance:It’s never a happy situation paying up fat bills at the servicing center. Every time a servicing is due, don’t we feel it’s too soon?
- Traffic sucks:Getting anywhere by road is a test of patience in over-crowded metros. Add to that, nagging health issues that come with long hours of driving. Having a driver comes with added costs. From my experience of keeping a driver, I had to pay overtime to him every single day over and above his salary. To avoid getting stuck in traffic, I would have to start early and leave office late.
- Finding Parking is a nuisance:Driving towards city center for a meeting? You must wish good luck to yourself with finding parking. Do you also feel parking charges are getting exorbitant these days? It is one of the reasons cabs are a lot more convenient I feel.
Everything has its pros & cons, and each one of us is in a different situation. All I can say is assess your situation and do think hard before buying a car. A little mind over matter can make you laugh to the bank.
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The back story
My 2-year-old almost every day stops over at the ‘Turtle Aunty Home’. After play time, he asks to make a pit stop on a floor below ours where this aunty has a pet turtle. He loves to watch the reptile respond to sounds, eat its given food and take its head out when it wants.
Yesterday, we reached her door. Even before we could ring the bell, ‘Turtle Aunty’ opened it to let a few children out of her home. Kids with heavy back packs and very solemn countenance made way into the lift. Aunty welcomed us in and while my son enjoyed his turtle time, the two of us got chatting. I learnt that it was a math tuition class called almost as an emergency since the next day was exam day. The class will assemble again next day to analyze the questions in the paper. I was impressed with her dedication. More chatting ensued as aunty went on to talk about her love for math.
The story of passion
She said she had always topped math exams in her school and made sure her daughters continued the winning streak. There were trophies of various sizes decorating her living room. As a child, she enjoyed the tag of a ‘bright student’ by family and friends. After her marriage too, her in-laws were won over in no time as they got to know about her fluency with the subject.
I heard her tale of passion and in my awe, asked her how she calculates her finances like budgeting and investing. Who else than a math whiz could excel in it. Suddenly, Aunty drew a blank. For a second, I thought I asked a wrong question. After a moment, she said that money management is done by her husband. He allocates monthly expenses to her which is the only part she manages.
Sigh! The tale of passion was now a tale of disbelief. “Never mind”, I thought and asked her for a glass of water. Such a capable lady deserves to do much more. And I couldn’t let the opportunity pass, to tell her that. Yes, it was time to introduce her to the real math – the 50-30-20 math.
The Real Math
We all broadly know what we want money to do for us. We just have to spell it out in what is called as short-term and long-term goals. These goals have to be achieved with some bit of planning. You have to do budgeting smartly to your monthly income post taxes.
50% of Your income – Essentials
To begin abiding by this rule, set aside no more than half of your income for the absolute necessities in your life. In general, these expenses would include housing, food, transportation costs and utility bills.
30% of your income – Discretionary
This is the category that can bring the difference. It’s the part you spend on your lifestyle and therefore the more you keep this in check, the better you can channel towards goal achievements and future.
20% of your income – Savings
This part should be non-negotiable. You have to allocate this amount to savings & investments after taking care of your loans and other debts. This is the part that makes your net worth / corpus / portfolio and will take care of goals.
While documenting my experience yesterday, I found this very simple representation of the rule.
Aunty grasped everything in no time and had a few doubts to ask. I was extremely happy she took keen interest. Little man however, had his fill of the turtle and asked to be taken home. Aunty and I promised each other to continue our discussion later.
Now its me who can’t wait to make a pit stop at the ‘Turtle Aunty Home’.
I was looking at my Instagram feed. My friend Manisha’s new post popped up. It was a photo from her off site. I thought to myself, “she looks resplendent”. Within a second, my watsapp was open and I was typing to Manisha. She was online and infact relaxing on a hammock under the evening skies. The breezy beach after a day of team building exercises was her only company at that time. We got chatting. I was happy to see her look so great, and told her so. She sent me lots of love. The next thing I asked her was how were things with her. She instantly knew what I was checking about and took the effort of replying in detail. She mentioned that she sorted her financial mess, quit the workplace nearby that made her feel a persona non-grata and joined another place at a far senior role. Travel is a bitch but she is in a deserving place finally. We said our bye-byes and fixed on the coming weekend to meet. Manisha, my friend had given me a panic call 4 months back. She had meagre savings, no major investments (an FD, a life insurance policy and a PPF), a home loan, a car loan, 2 high limit active credit cards. She lived an enviable lifestyle, drawing an earning of around Rs. 20 lacs per annum. Her husband’s salary was also a handsome figure. Between the couple they had split spends. Running expenses, children’s quality education and annual travels went to husband while Manisha helmed the responsibility of saving and investing. One day, they had had hosted family friends who asked them how they managed their portfolio. Both Manisha and her husband were flummoxed with the question, to say the least. That evening, I got the call. We met the next day. It took me half a day of discussing and questioning Manisha about her income, expenditure, assets and liabilities. Having gauged the depth of her situation, I made this recovery path of sorts and gave her to follow. Over the next fortnight, we got a lot of it implemented.
- Streamline Expenses
- Get rid of debts
- Define goals and invest for them
Let me touch upon it in some more detail so it could be of some use.
- Get your lifestyle on a budget
First up, I understood from Manisha what were her usual expenses like, how indispensable were they. In her case, there was a lot of impulse spending. Her credit card was swiped at the drop of a hat. There was not an iota of planning with money. Her credit cards had high outstanding amounts. We assessed her inflow and outflow and created a monthly budget to follow. Manisha was put on credit card detox with immediate effect. She also cleared the outstanding from the balance in her salary account. Here’s a tip. When you want to stay off credit cards, you can start spending in cash. This is what we did with Manisha. Using cards doesn’t give an immediate sense of losing money and therefore it’s much easier psychologically, to spend.
2. Say no to ‘em expensive loans Living in debt is the most hazardous way of living. The first step to financial semblance is getting rid of expensive loans. And like Manisha, when you have multiple loan accounts, you have to start with the most expensive loan – Credit Card. Next was the car loan. We did a little math here. She was half way through her loan. Fetching an 8 percent annually on FD was a sub-optimal choice. She was paying over 10 percent rate of interest on car loan. It took some convincing but Manisha had little options remaining. She discontinued her FD and closed her car loan account. Next was a joint home loan by her and husband. It was a rather large amount to pay up, plus the couple was getting tax breaks on interest amount as they both were in highest tax bracket. So, the home loan continued. But they decided to use their performance bonuses for the year to foreclose a part of the loan by foregoing their international holiday.
3. Don’t save. Invest. Merely checking your spends will never provide for future. It requires planning and consistency in investing, not just plain saving. We met a professional financial planner, who did a deep dive to arrive at what kind of monies they will require in future and how to achieve them. Their goals were bucketed in short and long terms. By cutting down on wasteful expenses, Manisha managed to save a considerable sum from her salary. All the money saved was pivoted towards well-chalked out goals. For short term goals, she invested money in debt funds. For long term goals, she started with equity funds. Manisha’s car EMI contribution was free now. The planner immediately started an SIP of the same amount. Manisha and her husband realized that their savings were much lesser than similar earning couples. They decided to increase their SIP amounts with every hike they would get. Having done so much of financial cleansing, they still were unable to work towards retirement planning. But it was now on their radar and in a year’s time they would get started on it. Meanwhile, I am not able to decide a place to meet Manisha. A fancy lunch never sounded vainer to me. Financial detox is very rewarding but not easy. Maybe, meeting for a walk or run would just be the best catch up.