Saturday, August 15, 2015

HAVE YOU SAVED FOR YOUR RAINY DAY YET?

 What’s this “Saving for a Rainy Day” mean which you would have heard umpteenth times?


Rainy Day Fund is a Fund which you can easily access to any given point of time to handle any unforeseen unexpected expenses without an iota of remorse/guilt.
While each Financial Planner will have his own logic and reasoning for recommending any particular fund, one particular fund which EVERY single Planner will strongly recommend that you should have is the RAINY DAY FUND.
Now, this Rainy Day Fund is called by various names such as Contingency Fund, Reserve Fund, Emergency Fund, etc.
I prefer the names Rainy Day Fund and Contingency fund.
Each and every Financial Plan must compulsory with a Rainy Day Fund.
The absence of a Rainy Day Fund could rock your Financial Plan and could even land you in Debt!



WHY THE NEED FOR THIS RAINY DAY FUND?
We live in an era where joint family is a endangered species and thus you are left to fend for yourself even in a emergency financial situation.
In a Contingency Situation, the options for you could vary from selling your prized processions to selling your Blue chips shares/Mutual funds to taking a Credit Card loan or even borrowing from your friend or the next door moneylender.
But, this could lead to potentially rock your Financial Plan.
The presence of this Rainy day Fund thus ensures that your Assets are protected

WHAT ARE THESE EMERGENCIES????
Upgrading from a Maruti 800 to a Mercedes Benz is NOT an Emergency!!!
A sudden Medical Complication in the family fits in as the Best example of an Emergency.
True, a health Insurance will be there and should cover the bill, but Mediclaim does NOT cover everything and sometimes, during these medical emergencies, not many will have neither the patience nor the time to go through the procedure of following up the Health insurance companies.
Job losses have become a common part of our daily life.  Losing your job without a notice period is another case of an emergency.
Even a Sudden House Repair (due to Earthquake or a Huge Rainfall following which Water creeping into your home and damaging interiors)  too comes under the category of a Contingency.
So, at the cost of sounding repetitive, let me reiterate, Any Unforeseen Expense which is capable of upsetting your Financial Plan is a fit case for linking to a Contingency Fund.


HOW MUCH FUND SHOULD BE KEPT FOR EMERGENCIES???

Unless the situation actually occurs or arises, one can never be sure of the amount you require in a Contingency Fund.

But, to be absolutely safe and secure, Financial Planners, normally recommend that you need to have 4 to 6 months of your monthly expenses kept aside as Contingency Fund. Since, not many are comfortable with this big chunk of money kept blocked, I normally recommend anywhere between minimum of 2 to 4 months of Monthly expenses as Contingency Fund.

This amount of Contingency Fund could vary depending on our job profile, your Family structure (joint/nuclear).


WHERE TO KEEP THE CONTINGENCY FUND?
The Contingency Fund should be easily accessible. It is encouraged that your Spouse/Life Partner knows about these funds and how to access these funds.

Contingency Fund could be parked in form of Savings Bank Account, Bank Overdraft facility, Liquid Funds with Mutual Funds.
The Primary purpose of a Contingency Fund is the Preservation of Capital and returns should be treated as Bonus, nothing else!

I would recommend that you split your Contingency Fund into
30% in SB Account
30% in Flexi Deposits
30% in Liquid Mutual Funds
10% in Arbitrage Fund (yes, I know, I am creating a bit of controversy here.......).

Why Arbitrage Fund?

Yes, it is quite unlikely that you will be using your entire 6 months of Contingency fund in one go.

And,  even if yes,  the Contingency could be either 1 month away or even 10 years away (or if you very lucky), could never happen!.
 And, emergencies come in all forms and there are some kind of emergencies which allows you the luxury of arranging funds after a few days.


But, do remember, having a Contingency Fund, is purely for a Contingency and if you earning anything out it, it should be treated as a Bonus only!

And, please, for God's sake DO NOT CONSIDER YOUR CREDIT CARD AS YOUR CONTINGENCY FUND!!!
That’s why it is called a Rainy Day fund and not a Reserve or a Pocket Fund!


HOW TO GO ABOUT CREATING A EMERGENCY FUND?
It is not that you should keep 4-6 months of your Monthly Expenses in Contingency Fund at one go. Go about it slowly. Start with 15 days of expenses, then 1 month and gradually scale up.





FINALLY,
Keep your Contingency Fund untouched. Remember it is for CONTINGENCY and not a Reserve Fund for you to dip into every now and then.
I have seen many Investors dipping into Contingency Fund of make up for shortfall in some other goal (mostly short term), which is very unhealthy.
Contingency Fund acts as a Shock Absorber of a Financial Plan. Absence of it can make a Financial Plan turbulent

Most importantly, do not forget to have your Contingency Fund backed by Adequate Insurance.  Do remember, a Contingency Fund goes hand in hand with a Term Plan Cover and a Health and Accident Insurance Cover.


So, with a Contingency Fund in place which acts as a cushion in case of a Financial Emergency, you can now concentrate on your building your Financial Moat.
Best of luck,
Srikanth Matrubai




Also visit http:/http://goodinsuranceadvisor.blogspot.in/

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