PPF (Practical Personal Finance) Series: Chapter 1: The CA Spactrum!

COVID19 crisis will prove to be a "litmus taste" of your career, skills, current job security and your future prospects. In one survey, 38% Indians say that they are worried about their jobs (1). According to other article, 100 million and more jobs in India are at risk (2). These are initial estimates, as we don't know how far the things will go from here. Things may not become as bad as expected too. None knows the future. But, one thing is for sure. In these troubling times, those, who had saved the money, those who have the cash, are the real kings!

I hope you recall a story of the cricket and ants. There used to be a beautiful garden, in which, a cricket used to live. There was a colony of ants in the same garden. As the beautiful summer was passing by, the cricket would enjoy the delicious food, sing, dance and make merry. The life was just too good to believe. He would take rest in the noon and night. The ants, which were living nearby, meanwhile, would keep collecting a lot of food and storing the same in their colony. They would toil hard the whole day before good night's sleep.  One day, the cricket made fun of them. He inquired why the ants were storing so much food and doing a lot of unnecessary hard work. There was enough food and the ants could afford to enjoy themselves like he did. The ants didn't bother much with them as they had a lot of work to do! Time passed. The summer gave way to the rainy season. The garden got filled up with rain water. The food supply started reducing. The cricket, meanwhile, continued to struggle to find the food, while the ants had stored enough to last through the rainy season. Ultimately, we can choose two possible endings to this story. One, in which, the aunts supported the cricket, provided him with food and he survived the rainy season and learnt his lesson. In other, the ants turned him down and he died of hunger.

Whatever end you choose, COVID19 will force us to think how we have managed our finances: like the ants or like the cricket. The fact is, all of us will fall into this spectrum - The CA (Cricket Aunt Spectrum) spectrum! Some are tilted towards the Aunts, and some are tilted towards the Cricket. Some may be in between.

The reason for sharing the story was that a lot of people are going through the financial rough patch as the income may have stopped but the EMIs and other expenses do continue. If you, my dear reader, is titled towards the cricket, you would not be relaxed. On other hand, if you are tilted towards the ants, you should be fairly relaxed, or not, as much tensed. 

Let us then learn, in very simple, practical and non-technical way, how to start our journey towards being an ant!:

I love a proverb, "The secret of success lies in your routine". Yes, routine is the answer to this type of problem. The best way to save money is not simply to "cut down" the expenditures. It is about saving regularly, when the summer is on (i.e. when you have regular income in normal times). 

The first and the most important thing to do is to create an emergency fund. The emergency fund is your last line of defense. You use it when you have no other means to spend money. In other words, once you run out of this fund, you will have to take a loan. How much money should one have in one's emergency fund? How to create such a fund? In which products should one invest to create such a fund?

The emergency fund should ideally have minimum six months' expenditure - including the EMIs you pay, the fees of schools of your children etc. In short, it should cover every single monthly expenditure on board. The amount then can be decided by multiplying this by six. For example, if your monthly outgo is Rs. 37,000. Then your minimum emergency fund should be: 37,000*6. That roughly comes around Rs. 2.25 lakh. The question then is that, is that enough? In the past six months' emergency fund was considered to be enough. But given the current environment, the experts are now asking people to have upto two years' (24 months', you heard it right) monthly outgo as the emergency fund. So, in our example, that comes to 2.25 lakh * 4 =9,00,000 (0.1 Million Rupees)! That's big. But the bigger it is, the better it is.

once you know the amount, the second question is, how to create such a fund. Answer is, go for monthly saving products like Systematic Investment Plan into a good liquid fund (generally of a fund house supported by a big bank, like SBI or HDFC or ICICI or Axis). You should not select the liquid fund with good returns, as it will lead to unnecessary credit risk. If you do not trust mutual funds, stick to Recurring Deposits (RDs) of a good bank like SBI or HDFC. You should start this type of SIP or RD with a purpose to create the emergency fund. Remember not to withdraw money from this emergency fund for any purpose. It will dilute the idea of an emergency fund. The product you choose for an emergency fund should be easily liquidable and should not be risky. Overnight funds are also a good choice. Take the help of any knowledgeable person if you cannot do it yourself. 

In case you have a lump sum amount, you can invest in FDs/Liquid Funds. Ideally, you should diversify this emergency amount into atleast four places: FDs with two banks and Liquid Funds of Two Big Fund Houses. (25% amount in each).

Last words: Remember this emergency fund should be invested in such products which preserve capital, and rate of return is not at all important in these products. Plus, you must not utilise money from this fund for noble purposes like lending a needy friend. For that, you must define the idea of "financial emergency" prudently.

Feedback is welcomed. Please write to pvariya@gmail.com

(1) https://economictimes.indiatimes.com/news/politics-and-nation/covid-19-top-worry-of-urban-indians-followed-by-job-loss-crime-survey/articleshow/75492760.cms

(2) https://www.outlookindia.com/magazine/story/business-news-100-million-and-more-indian-jobs-are-at-risk-after-covid-19-lockdown-is-your-job-safe/303094