Consider these seven steps to generate an emergency fund for a rainy day

Nirmala, a client of ours, asked us a pertinent question three years ago during the financial plan presentation: what is the emergency or contingency fund you have planned for in my goals when I did not enumerate the same in the data-gathering sheet?

She looked perplexed and wondered why we are asking for her cash balance in the bank, her fixed deposits and her liquid assets.

Little did Nirmala or even we know back then that something as drastic as a pandemic would affect the lives of millions so dramatically.

Back then, our intent for an emergency fund, which we planned at the drawing board stage for every client whether they asked for it or not, was for job loss or medical emergencies or just something tucked away for a rainy day.

Today, Nirmala smiles when we discuss her annual goal review and herself updates her cash and liquid balances. Today, cash is king. The need for liquid cash has become all the more important.

There are many unlike Nirmala who don’t have a financial adviser or who had planned for contingencies. Some of the ways one can generate cash immediately are enumerated below.

1. Profit booking and portfolio rebalancing

Markets are high, valuations are up and some amount of tactical asset allocation will play the lucky card when the situation changes to cautious.

2. Consolidating properties

Selling a property even if one were to exit at a 15% discount to market price will help create that extra cash balance for uncertainties and help improve one’s cash position. If there has been an ongoing negotiation for a property, this would be a good time to consider selling it and increasing the liquidity position. A bird in hand is worth two in the bush.

3. Selling of unwanted insurance policies

Miss-selling in insurance is rampant. Many a time, policies are purchased for reasons such as helping relatives, who are agents, meet their targets. Families were made to buy life insurance policies that fill the pockets of agents rather than customers. By surrendering the policy, cash flows become better, inflation-adjusted returns on other investment options are achieved and portfolios are consolidated.

Another option is making a policy paid-up, which means a policyholder stops all future premium payments on the policy. Maturity benefits paid on maturity will be adjusted accordingly at a lower value. The decision to surrender a policy or make it paid-up depends on the time horizon to maturity, maturity date, premium amount and internal rate of return on the investment.

4. Reduction in expenses

Expenses towards travel, eating out, petrol and group fitness activities like going to the gym have reduced. This automatically has improved cash flows for many people. As clichéd as it sounds, a rupee saved is a rupee earned!

5. Reducing debt and EMI burden

If you are one of the lucky employees to have received a bonus for the past financial year, or an increment in salary from your employer, then it would be good to evaluate this as payback time to that home loan, auto loan or credit card loan.

EMIs sometimes create a big strain on home finances and budgets. An EMI-to-income ratio exceeding 30%, meaning using more than 30% of your income to service debt, is not financially healthy. This is not good and it’s best to make partial prepayments and or reduce the monthly EMI outflow.

6. Rental outflow reduction

Negotiating down your monthly rent with your landlord can help bring down your monthly expenses. The second covid wave has brought back work from home for many employees, reducing the necessity of living in metros or areas close to business districts.

7. Moving back to hometown

In the digital age, work from home is the new normal. Moving back to your hometown means that rents stop and one can also live with his/her family.

In times of uncertainty, you won’t be asking the same question Nirmala asked us three years ago. In fact, you would be thanking your financial adviser!

Dilshad Billimoria is a Sebi-registered investment adviser and managing director of Dilzer Consultants Pvt. Ltd.