Dealing With Financial Imbroglio

When we think of an emergency the first thing that often comes to our mind is the sound of a siren as an ambulance speeds through the streets and then a patient being moved on a stretcher though sanitised hospital corridors, a team of doctors in white coats all hurrying together.

But even as we are aware that emergencies can strike us any moment we somewhere wish that it will not happen to us. But life often throws up shocks that we are least prepared to deal with. Even as we have no choice but to tackle the emotional consequences, the financial impact is often too severe to bear. For this reason it is very important to be financially ready for any sort of emergency and plan in advance.

“Financial risk management is an essential part of financial planning; different financial emergencies are managed differently,” said Renu Maheswari, Co-Founder and principal advisor, Finscholarz Wealth Managers.

This is why it is very crucial to create an emergency fund. “An emergency fund is a corpus, which can be used to meet expenses related to unforeseen events of life. The aim to have emergency money is to avoid financial hassles which may deviate you from saving for your long-term goals” says Hemant Beniwal, Director, Ark Financial Planners. An exigency fund is to be utilised in uncalled for situations like medical emergencies where health insurance is not adequate or leads to income emergencies like a job loss.

“It is this emergency fund that will help an individual stay out of a debt trap,” says Maheswari. She cites the example of people from the economically weaker sections of the society who get into white collared jobs. The family does not have financial resilience to handle any emergency and depend on the young bread earner. In case of an emergency a lot of them end up taking up personal loans or credit card loans and end up being enmeshed into debt traps.

There is a general thumb rule that one should maintain at least three to six months expenses as an emergency fund. However this one thumb rule will not suffice for all. Beniwal suggests that in case one is in a volatile job or business, with no other source of income, one needs to maintain at least 12 months of monthly expenses in the emergency account. In case one has a stable job but has a mortgage or an EMI running which is over 40 per cent of their salary, one should be keeping 9-12 months of monthly expenses as emergency fund and at least six months EMI in emergency expenses. In case one has a fairly stable job and working spouse, the emergency fund should take care of six months of your monthly expenses. In a situation where both spouses are working and there is hardly any debt, an emergency fund that takes care of three months of monthly expenses is enough.

Remember that the emergency fund needs to be liquid and easily accessible. Beniwal suggests keeping 10-15 per cent as cash ready. Some of it can be put in banks savings account with FD sweep facility and ATM cards. Keep aside the rest in liquid funds and short term debt funds which can be withdrawn quickly. It is advised to have a separate bank account and set up an auto debit facility so that the required corpus is reached.

While creating an emergency fund is the root of preparing for a financial emergency, the next important thing to do is to get adequate insurance cover.

“In case of risk to life of a bread winner pure term insurance should be bought to protect from this financial risk,” said Maheswari. Make sure that the ‘Sum Assured’ is enough to take care of daily living expense for life of dependents and the financial goals that the bread winner is supposed to take care of. Here one needs to carefully calculate insurance needs and not go by the rule of thumb.

“Financial risk of bad health of bread winner needs to be treated slightly differently than the non-earning members of the family,” adds Maheswari.  She suggests that the bread winner should take critical illness plans along with the regular health insurance to cover the risk of loss of income. “Most of the insurances come with co-payment or part payment liability. We recommend creating a medical contingency fund to take care of such sudden financial requirements without disturbing long-term investment for specific goals.” A cashless policy helps with the cash flow needs.

When emergency strikes it is important not to panic. “Nobody can predict when an emergency will strike and most of us, the times the financial impact is the biggest problem for anybody. So we should be prepared financially to the maximum extent possible. If one is well prepared for an emergency,  the impact will be considerably lower,” said B. Srinivasan, certified financial planner.

It is important to keep calm and not take random decisions in such a situation. In the words of Anant Ladha, Founder, Invest Aaj For Kal, “When an emergency strikes the chances of making a financial error is at the peak and we may have to pay for the wrong choices we make. Having a financial planner always adds calmness and helps us make rational decisions.” Have information of all investments and finances at one place, sit with family members and your financial advisor and then decide on a plan. With finances in control, tiding over an emergency becomes more manageable.

anagh.pal@outlookindia.com