A few days back I had written about cash as a strategic asset for businessmen. It can be an emergency asset for an individual. When Iraq decided to invade Kuwait many people (including Indians) had to leave Kuwait almost overnight and run for their lives. A friend was stuck in Kuwait – along with his employees, family and friends.
Taking responsibility for his whole team, he hired a nice Merc bus from Kuwait up to Iran – and flew down from there to India. What worked as currency for him was of course cash, movie tapes of Amitabh Bachhan and Raj Kapoor, his American Express gold card, gold chains and other gold jewelry.
If you tell such a man that holding cash is foolish – he will lynch you.
Of course you need not face such a dire situation. Many people use the undrawn limit on their credit card as an emergency fund. In a bull market that looked fine, in a bear market that is risky. If the size of the emergency fund that you should have is being determined by an outside company, you could be in trouble. Look at what happened to employees of Satyam. Suddenly the limit was decreased.
Even other wise if you spend 3x of your salary on a medical emergency. The interest rate on the credit card will hurt you. If you earn say Rs. 40,000 a month. You should build up an emergency fund of say 6x your expenses (say Rs. 25k a month) i.e. Rs. 150,000. It is not easy to build up this kind of amount in a simple floater fund when the temptation to blow money is high! However, the balance helps because in a liquid/ floater fund it is growing at least at 7%.
If you did not have this kind of a fund and you actually spent it on your card, the amount of time it takes to repay such and amount (with interest at 42% p.a) is not funny.
So cash a strategic asset is also a saviour asset.
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