We can handle emergencies today, but tomorrow?

Published: August 11, 2017 at 12:47 pm

Last Updated on

“Pessimism is a self-fulfilling prophecy”. These words by Sandeep keep ringing in my head all through the day. Two days ago I was chatting with a few friends on FB. I stepped out for a bit, and came back to find my less than 2-year old laptop screen say, “ disk not found”. A few days later the service person told me that the disk drum is broken. A new hard disk set me back by a few thousand and I am yet to know the cost of data recovery from the old disk – my guess, at least 15K.

Last month, I was shocked to find that the electricity bill for the last two months was a big fat zero! This is impossible as someone is always at home. Turns out, my neighbours had gone to the US and my EB meter was connected to theirs and vice versa. The wrong-connection was made in Sep. 2015. Since then we have been paying each others bill! So when I sat down to check, turns out I need to pay him about 10K!

Perhaps I am to blame for the first expense for taking regular backups (oh that is so boring), but the second expense?! That is the nature of emergencies. We can neither predict their source or nature.

Yes, a healthy emergency fund is essential, but it is important to recognize that the ability to replenish the fund after each emergency is more important.

We can replenish the emergency fund from our salary, reduce the investments that we make for a few months or as a last resort redeem from some of our investments, depending on the nature or severity of the emergency. That is life, no amount of planning can help beyond a point.

The question is, how are we going to handle emergencies after retirement? Especially when so many of us dream and plan for early retirement? I cannot live without a PC today. It is where I work, read, engage socially and get entertained. So if the PC fails, it is an emergency for me and it could well be for the rest of my life. I have regularly spent new PCs or repairs every other year. So it is practically a regular expense that will persist after retirement.

Imagine if the electricity meter situation had hit a senior citizen in the 5% or 0% slab with most of the income from pensions and interest. A sudden expense of a few thousand (will not as big as mine, but still) will rock their boat. How do you think the retirement crisis gathers momentum?!

Well, the point is, people who use my retirement calculators complain that I am being pessimistic and those who read my early retirements posts or e-book refer to me as “that conservative author”. Such expenses justify my conservative stand.

Once the salary stops, our ability to handle emergencies will take a beating, unless we have a large enough corpus. In order to have a large enough corpus, we must invest with the right asset allocation and strategy and invest as early as possible. More importantly, we must invest enough.

We will invest enough only if we err on the side of caution and work with at least 8% inflation and only 10% return on equity. Change these numbers today in the assumption that “it will all turn out fine” or “God is there” and invest less, then a single emergency can crack our financial castle.

Bottom line: invest at least as much as you spend today, preferably more. As they say, pray for the best, but prepare for the worst.

If only optimism was a self-fulfilling prophecy!

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. Nobody can do anything about these kind of things Professor. Unlike Health emergencies these things are not serious, these would make a small dent but are not serious both emotionally and financially. So, I think it is better to not think of such things.

    If done meticulously, I guess even optimism could be a self-fulfilling prophecy and you are pushing us right into that zone with your articles.

    1. Owing a neighbour 10K is a pretty serious business my friend! It can get emotional real quick if you don’t have the money to pay. And you are assuming a retiree will not have important data stored in a computer. Maybe not today’s typical retiree, but not tomorrow. Doing something meticulously is independent of optimism or pessimism!

  2. Like I said in a previous post, I am also a realist Professor but things like this will happen. What could we do to stop them apart from keeping another ‘not-so-serious emergency’ fund handy, if we are really that concerned now or after retirement.

  3. I am a retiree aged 88 and my wife is 80.No dependents.Stay in Bangalore in a rented house with 5% increase in rent once every 11 months.I had planned all this with lots of cushion on the expenses side. Only thing I had not planned was I would see 88th year.Now I find that I have to take small additional riisk and for the first time in my investment carrear I have to invest a small portion of my income in an equity oriented mutual fund.So my advice to the younger generation is better be pessimistic in your retirement plans.

  4. Each one of us have different experiences in our lives and also at different ages, professions, needs and so on. There is no right or wrong. Personally tasting success initially, then failure and on the path to recovery, I like what our professor writes, because I can easily connect. That may not be the case with others who may see it as being too pessimistic. It is how we well we manage ourselves in the face of unexpected events is important.

  5. The answer is simple. Live a life of moderation, stop accumulating and start living. Personally I have enjoyed both success and failures – hardly changed my lifestyle – enjoying my life with very less accumulations of things apart from money. Do not see any worries today or tomorrow – whatever comes I’ll face it 🙂 . Thinking that you should and can control everything affecting you is unrealistic and is the main reason of worry ! No pessimism or artificial optimism – just plain neutral stance – do whatever you can and not bother about the results.
    P.S. I have minimized in every aspect which needs you to take care of it instead of living your life – why cant people minimize the things they accumulate ?

  6. Pattu..My realisation is as follows;

    There are very few lucky ones who have the ability to learn thru’ seeing, reading & listening…which I call indirect lessons.

    Majority learns thru’ life’s experience. Direct lessens.

    Life is greatest teacher.

    Very few never learn. Sometime Life becomes merciless to them also. He is also the only one teacher who kills his own student.

    Regarding your articles, I just read & become aware of many aspects , alongwith risks & threats to my financial health. I check if I can do something about any risk when identified. If not, I await opportunity. However, I try not to get worried anytime.

    You are doing a fantastic job.

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