A financial plan is a road-map to achieve your life’s financial goals. These goals can be planned ones like – your retirement goal, Kid’s education goal, vacation planning, purchase of house etc., All of us do try to save and invest in one way or the other for these planned goals.
But, Life is full of If’s and But’s. Not everything always goes the way we planned. There can be some unpleasant surprises. Whether we like it or not, uncertain moments/events always come announced in our lives.
So, we are better off saving for;
- Cash Fund or Emergency Fund = Save for unplanned events + Save for some recurring (short-term & planned) events in life.
- Care Fund = Save and invest for building a separate Health-care fund over a long period (say 10+ years), to meet any unforeseen and large health-care expenses.
- Crash Fund = Save and invest for building a separate corpus so that you can use it to deploy in your existing or new investments, for your financial-goals, when financial markets are in turmoil.
How to plan for building Cash, Care & Crash Funds?
We can follow a simple equation like the one below;
Income – Savings for Emergency fund = Disposable Income – Living Expenses – Investments= Surplus Income (if any)
- Cash Fund : You can aim to mandatorily save some portion of your income towards this fund, even before allocating income for your living expenses & investments.
- Care Fund : As part of your investment plan, you can allocate some portion of your investment surplus towards accumulating a health-care corpus, but, after allocating for your important financial goals like Retirement and/or Kid’s education planning etc.,
- Crash Fund : Once you believe that you are comfortably saving and investing for Cash fund, Care fund and Financial goals, you can aim for accumulating your Crash Fund.
Where can you save for these three funds?
- Cash Fund :
- You can accumulate your Emergency fund through saving account, bank FDs, Recurring deposits, Liquid funds etc.,
- On personal front, we maintain two Emergency Funds. We do not take any risk with one kitty (we call it as ‘rainy day fund’) and maintain around 6 months of our living expenses in Savings account and FDs. We also maintain a second fund, where we are now saving around 12 – 24 months of our living expenses in bank FDs only.
- Kindly do not chase ‘returns’ when it comes to saving for Cash Fund. Liquidity and safety of your capital are more important than achieving EXTRA returns.
- Care Fund :
- Note that this Care fund of yours should be exclusive of your Health insurance plan.
- You can consider saving / investment avenues like bank FDs, Arbitrage Funds, Hybrid Funds (have higher risk profile) etc., to build your Care Fund over a long-term. (We have our care fund as well in Bank FDs only.)
- Besides saving for Emergency Fund (Cash Fund), try to invest as early as possible in your life and as much as possible for building Care Fund.
- Make sure your Emergency Fund and Medical insurance cover, is large and strong enough so that you don’t need to make redemptions from Care fund to meet medical expenses.
- You can treat ‘building care corpus’ as a separate long-term financial goal.
- Crash Fund :
- Once you make allocations for building emergency fund, important financial goals, living expenses and care fund, in case, you are lucky enough to still have ‘surplus income’, can start building your ‘crash fund’.
- You can consider investment avenues like Hybrid Mutual Funds, Bank FDs/RDs, Arbitrage funds etc.,
- Financial markets do give investing opportunities (sometimes, once in a decade / life-time ones) to make lump-sum investments in Equity Funds and or Direct Equity. For example : The recent market dip due to Covid-19 pandemic is a good example. I am not vouching for TIMING the market, but encouraging you to save enough to make the best of the available opportunities (if any).
How large should Cash, Care & Crash Funds be?
This is a very tough question to answer. There is no right or wrong answer, as the quantum of these funds may vary from individual to individual.
- Cash Fund :
- To start with – I believe, maintaining a small Emergency Fund is better than having ‘NO FUND’ at all.
- As a rule of thumb, you can maintain EF in the range of 6 to 24 times of your monthly living expenses. You may even include annual recurring expenses like Kid’s education expenses, EMIs, insurance premium amounts, medical expenses etc., while arriving at your monthly expenses figure.
- Care Fund :
- As much as you can afford, can be saved for Care Fund.
- Crash Fund :
- Your surplus income, gifts, unexpected bonuses etc., can be saved for building Crash Fund.
Planning for these funds is not a one-time activity. You may have to review your saving plan periodically. Also, you need to have a re-look at your contingency fund based on certain events that happen in your life. Your requirements may change over a period of time, but having a certain amount as a Cash fund is a must, regardless of what stage you are at in your life.
We are all aware of the fact that medical expenses have been growing rapidly. It is a prudent thing to have a separate Care Fund for meeting any unforeseen health emergencies. In case, any of your family member / dependent has a medical history of any critical illness, it is highly advisable to have a stand-alone Care fund (besides having a health insurance cover).
In case, you had to use your Emergency fund to meet any unforeseen contingencies, you have to start re-building it immediately.
Live within your means and try to save more to replenish and build your contingency fund(s).
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(Post first published on : 08-July-2020)