How Not To Be Financially Vulnerable

The lady in the salon where I frequent shared her financial situation with me once. She told me how she and her husband bought a tiny home (one room, kitchen) with a home loan. When the pandemic hit and there was no income, she said at least they never had the stress of paying rent because they owned the house.

Her husband developed a nerve condition and can no longer work. For one, she is relieved that at least they have a roof over their head. Now it is her income that runs the household, and her college-going daughter has a small-time job that helps. I liked the phrase she used, “we are each other’s safety net”.

Yes, family is a safety net, but it is not sufficient. You need to provide another buffer. There are few individuals who have never undergone financial stress. In fact, I would say that at any point of time, we are all financially vulnerable to some extent. If for no other reason than a sudden change in circumstances or health condition can hit us hard.

A monetary issue is not just a game of numbers. It has instant emotional repercussions. Financial strain increases stress levels exponentially. Being financially vulnerable is also being psychologically vulnerable. You cannot blindly hope or assume that all will be well.

Here are three extremely practical ways to reduce financial and psychological vulnerability.

Build An Adequate Emergency Fund

We often make the naïve mistake of assuming that our monthly pay cheque will cover whatever life throws our way. Your salary may cover some emergencies or contingencies, or may not.

Life has a way of surprising us pleasantly, as well as nastily. The pandemic was the most recent massive jolt that people all over the world got. It gave the concept of ‘Emergency Fund’ a fresh perspective. But other issues may crop up, too, like urgent dental treatment, travel in case of death or illness, sudden home repairs, the need to buy an air conditioner, or replace the refrigerator in peak summer.

On the extreme side is the loss of job. Till you get another job, you still have to make the EMI payments, pay the electricity bill, pay for your child’s education, insurance premiums, and put food on the table.

Crises cause emotional and financial stress. By having an emergency fund, at least the financial blow can be absorbed. That is why an emergency fund is not optional. You will always need a safety net, because emergencies occur even in the best of times.

Let’s approach this from another angle. Imagine not having an emergency fund. You have to look at alternative sources of funds. A personal loan or the use of your credit card is convenient, but carry a stiff rate of interest. Taking a loan against your house is not cheap either. Alternatively, borrowing from family or friends comes at nil interest, but it has its own share of the sense of humiliation and obligation. Eventually, all these loans will have to be squared off. Getting into debt because of an emergency is very stressful.

Tapping your own assets is invariably a better way to scrape up cash than borrowing. If you decide to sell your equity funds, then what happens if the stock market is abysmally low? You could be selling at a significant loss. Moreover, you would be drawing these funds from your retirement savings plan or child’s education plan. What will happen to those financial goals if you are going to deplete the money earmarked for them? You can say that you will eventually replace the money, but withdrawing cash means paying capital gains tax and compromising with the compounding benefit from these investments.

An emergency fund doesn’t put you in a vulnerable spot. It enables you to tide over a crisis without incurring debt, while simultaneously keeping your financial house stable.

If you decide that you need `10 lakh as an emergency fund, don’t get disheartened. Don’t panic if you do not have the money right away. Build it over time and ensure that others can also tap into this fund. If you meet with an accident and they cannot withdraw the money, the purpose is defeated.

Get Adequate Life Insurance Cover

If you have dependents, a term insurance plan is a non-negotiable.

When one brings up the subject of death, it is either viewed as a bad omen, or the individual is asked as to why they are being so pessimistic. There is nothing pessimistic about it, but realistic and practical. In fact, to assume that absolutely nothing will change in your circumstances is also being extremely naïve. Life can throw anything at your way. Instead of fretting about it, just hedge your bets where you can.

Imagine the plight of a family where both spouses are working, and one of them passes away. Besides the emotional devastation, the tragedy would be compounded as one income has stopped and there is no life insurance as a safety net. This safety net, through the sum assured, would have helped building your spouse’s retirement kitty, provided for your child’s education, and even cleared up any outstanding debt.

If you are the primary source of support for even one other individual, get your term insurance sorted out as a priority, and keep revising this limit as the number of dependents increase. You may take out a cover for your dependent parents. You then get married, your wife gets pregnant, and after the child is born, she takes a break from work. You now have four dependents. Changed circumstances require a re-evaluation.

Get Adequate Medical Insurance Cover

The same applies to having adequate health cover. Do not depend solely on your job for a medical cover. You will have no cover during job loss or in between jobs. If the limit on the cover is low, it may not suffice for every dependent. Get a personal medical cover for the entire family.

There is a line that keeps doing the rounds, “A middle class family is just one medical bill away from bankruptcy.” If that is too extreme, then let me tone it down a bit; just one illness of a family member can cause a major dent in your savings. Medical inflation in India is pegged at 14-15 per cent. That is a significant number. Talk to an insurance planner to get an objective take when deciding the cover you need. You can ask a couple of them for an estimate to ensure that you are making the right decision.

Remember This: You never buy medical insurance because you hope to submit a claim someday. You never buy term insurance because you hope your loved ones can submit a claim someday. You never start an emergency fund because you hope for misfortune. You opt for all of them to protect yourself and your family against a misfortune, for your peace of mind and hedge against the uncertainty of life.

By Larissa Fernand, Behavioural Finance Expert