Raj Mehra (name changed) was working in one of the top airline companies. He was married to a poet and had a two-year-old daughter. He felt his good six digit monthly salary was enough to serve the loans and household expenses, including the EMI on their luxurious 3BHK house and sedan. As we all know, the aviation sector is very cyclical and the firm was going through a tough time due to very high oil prices.
One fine day, Mehra suddenly got the pink slip and was asked to not return to work from the following day. Life shattered for him as he had a family to run, EMI for a luxurious house and a car loan. The most important thing which was missing in this was that he had zero savings and no emergency corpus for such an unforeseen event.
Many people would relate to this today as they may have savings but that may be locked in real estate or stocks whose rates have fallen quite a bit or in life insurance policies that are not liquid at all.
Maintaining an emergency corpus is very important because emergencies can come any time, and if you don’t have money set aside, you’ll have to break other long-term plans and sell things which might be kept aside for future goals or book losses in some investments.
Ideally, six to 12 months of a person’s salary can be kept aside, and invested into products that aren’t subject to market risks, and products where there is no lock-in, that is no charge on removing the money. However, it’s very different for different individuals, it can vary from sector to sector too. For example, someone in the aviation sector should have a minimum 12 months’ emergency corpus as the business is very cyclical in nature, whereas someone in the pharmaceutical sector can have three to six months.
If you are the sole earning member of a household, then a higher emergency corpus is needed.
Before you get out your cheque book to start investing in products or buy a luxury house or cars, you need to maintain proper discipline in this basic. It sounds very easy when we hear that an emergency corpus should be six to 12 months and it can easily be created but it’s actually the other way round.
I onboarded a client in April who used to invest by himself but my observation was that he never had any emergency corpus and now when we planned to create one, it will take him nothing less than two years as he has committed household expenses and EMIs which need to be serviced simultaneously while creating this corpus. Hence, the need to start early, before planning other goals in life.
Bank savings account, bank current account, cash at home, liquid mutual funds and fixed deposits can be a part of emergency corpus. I would prefer investing in liquid mutual funds as they can provide me higher returns than a bank account and would have no penalty like fixed deposits when withdrawn earlier. In a liquid mutual fund, one can sell and get up to Rs 50,000 in less than a minute into their bank accounts.
Emergency corpus being highly liquid gets used up quickly and thus we need to keep rebuilding the same.
I am sure that going ahead Mr Mehra or Mrs Anjali would never make this mistake again and plan their investments in a way that contingencies can be taken care of. They would be mindful that if this aspect of the portfolio is ignored then they would have to eat into their child education corpus, retirement corpus or take loans to take care of emergency needs.