Suzie Orman says: Keep enough money in ultra safe accounts to cover life’s emergencies, – say 8 months expenses – but no more.
Financial planners talk only of an income emergency. They do not talk about an asset emergency. When your assets crash and you are reluctant to sell at the current prices it is equivalent to not having the asset. For all your requirements in the next three years your money should be in assets you do not mind liquidating IMMATERIAL of the current price. Frankly to me it could include gold, money market mutual funds, arbitrage funds, FMPs, bank fixed deposits, or even in some equity index fund invested over a very long period of time – say 22 years, then, you should be indifferent to today’s price.
For most of your life you’ll want to set aside about six months’ worth of living expenses in the bank. That money covers the EMI, puts food on the table, and pays the kids school fee – should you lose your job. The fact that you’ll earn only about 4% is beside the point. This is a convenience, not an investment. You can’t take the risk. But once you have the basic cushion there is a tendency to invest it, correct? This was the most obvious thing to do. However 2008 makes us revisit this. If your daughter’s marriage is in 2011 normally I would have advised you to start withdrawing in 2010. Now frankly I am as scared as you are – I would happily start withdrawing from 2009 mid and keeping the money in an arbitrage fund with a huge corpus. Forget the returns and risk –YOUR goal is far more important is it not?
IF you were hoping to use your credit card as an emergency fund ask the Satyam employee whose credit limit was squeezed dry. A credit card’s ‘un-drawn balance’ may not be a great emergency fund. It was always the right idea to put money for near-term, big-ticket items in a safe place. But 2008 was a conspiracy against common sense. First, it seemed fussy and old-fashioned to deny yourself leverage and future growth by saving when your house and portfolio were appreciating at 30% a year! For a minute assuming your financial planner had asked you to sell, you may perhaps have changed your planner. It is tough to go against the tide!
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