Build a Cash Reserve for Emergency

When my father was working, he never worried about job security as his was a government job and it still is assumed to be the most secure job to have in India. Most of his friends were also in government jobs and we friends always thought that as kids that after studies we will join a job and continue there till retirement.

With globalization and privatization, and less and less government/semi-government jobs available in the the country in open category, we have no option but to either join a private company, or be self employed if we do not have a business. In private job - there are old economy companies and new economy ones like IT, Telecom, Financial Services and others. Moreover, there are multinationals some of them do not think twice before closing its operations in India if business is not growing as expected or if there is a change in India specific policy.

While new economy companies give higher salaries, higher annual increments, and higher career growth opportunities, they are also not tolerant to a dip in performance. There can be several reasons because of which a persons performance may drop - indisposition to self or in family, soured relationship with spouse, or some other family discord. Such conditions can result in the unfortunate outcome - "pink slip".

Getting a new job can be difficult and time consuming specially when you do not want to compromise and want an equivalent or a better job. This can sometimes take 6 months or more.

How do you support your family in this period? - Once this situation comes unexpectedly, you are left high and dry; dependent on your friends and relatives. Unless you are prepared for such emergencies.

Planning for Emergency

In order to plan for such a situation, you need to first compute you must-do expenses each month. I have tried to enumerate some expense heads which are mandatory for a anyone.

S. No.	Expense	Amount per month
1	House Rent or House Loan Repayment (or both)	Rs. 10000
2	Groceries	Rs. 7000
3	Electricity and other utility bills	Rs. 1500
4	Child Education Expenses	Rs. 2500
5	Any other loan (Example - Car Loan)	Rs. 7000
6	Minimum payment on credit card	Rs. 1000
	Total	Rs. 30000

In the above example, I have assumed that you have a sufficient medical insurance for self and family. Else please incorporate the same in the above calculation. It would be a better idea to buffer this figure with Rs. 20000 a month for medical expenses because medical insurance only covers the hospitalization and operation expenses and not the recurring and associated expenses that come with it. That makes your monthly cash requirements to be Rs. 50,000.

Now that you have computed the minimum expenses which are must-do and cannot be avoided. Find out for your own special situation (the type of job you are in, and the environmental factors that govern the industry/domain you work in), how many months of cash reserves you should have. At the very least, the emergency cash reserve should be sufficient to cover up to six months of above expenses i.e. Rs. 3 lakhs in the above example.

Investing your Cash Reserve

There are three options to maintain the accumulated cash reserve -

1. Savings Account
2. Fixed Deposit

All these options provide you liquidity (money can be withdrawn whenever required). You do not want this money to be invested in any risky investment.

The simplest option is to put this money in a Savings Account. If you are also keen on some safe returns, my advise will be implement what is technically called laddered investment of reserve explained below:

Go to your bank (should be one of the front line banks and not like United Western Bank - you do not want to end up in a situation when you cannot withdraw more than Rs. 10000 in 3 months when an emergency occurs) and open 6 fixed deposit accounts (all on the same date) in the bank as follows:

FD No.	Maturity	Amount in Indian Rupees
1	30 days (1 month)	Rs. 50000
2	60 days (2 months)	Rs. 50000
3	90 days (3 months)	Rs. 50000
4	120 days (4 months)	Rs. 50000
5	150 days (5 months)	Rs. 50000
6	180 days (6 months)	Rs. 50000

As each fixed deposit matures extend it for another 6 months without withdrawing the gains of interest from it. Keep on repeating this process for all subsequent months and all subsequent cycles till the time emergency strikes. My friend who has made an emergnecy cash reserve of Rs. 6 lakhs calls it rolling FDs.

The reason of intelligently investing your reserves (by the above technique) is that emergency can occur today or it can occur in future, say 3 years down the line. At that time you want your cash reserve to keep pace with the inflation else you will fall short of meeting your expenses.

In case you borrow further loan after setting up the case reserve, you will need to back it up with supplementing your cash reserve.

Suppose you borrow a loan which demands Rs. 10000 of EMI per month - Just supplement your cash reserve by Rs. 60000 and invest it in 6 Fixed Deposit of Rs. 10000 each as explained above.

In case you feel that you need to create a 12 month reserve. Please go ahead and do it - only in that case you will need to open 12 FD Accounts with maturities from 30 days to 360 days as explained above.

Happy Investing !!!