I believe securing our family and wealth with multiple safeguards is essential. To do this, we must ask, “What could upset our plans or harm our family?”. While I was setting my affairs in order, I often used to ask, “What is the worst that can happen to us from a financial standpoint?” This always led me to unexpected recurring expenses.
Consider the following:
- Life insurance will cover our family upon death, provided it is adequate and kept in force.
- Health insurance will take care of a family member’s hospitalization, provided it is often enhanced enough to keep pace with inflation.
- A large enough emergency fund should handle any sudden expense, from a car breakdown to non-medical expenses during hospitalisation, provided it is replenished regularly and quickly.
- Accident insurance is available for disability management to a certain extent
- In principle, critical illness insurance is available for CI management to a certain extent, but these are complex products.
- We have car insurance, two-wheeler insurance, home insurance, etc.
- We invest each month for our long term financial goals and save for our short-term goals. This is also a form of insurance.
- We stay off bad debt, understand the role of inflation on a home loan EMI and keep it manageable.
- Each month, our salary accounts for monthly expenses, EMI, investments, savings and a small contribution to the emergency fund.
So, what is the worst that can happen from a financial standpoint? If most of the above points are covered in one way or another, a person would be in charge of his/her finances.
What is the worst that can happen to topple such an individual’s life? When it comes to emergency expenses, a scenario keeps recurring.
Shops that stock expensive crystalware have a simple policy – “good to touch, yours if dropped!”.
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So, if I accidentally drop crystalware, I will feel terrible because it is an unexpected and unnecessary expense. A car breakdown is an unexpected but necessary emergency.
While what is necessary/unnecessary is subjective (for example, how do you classify a trekking accident?), the nature of the expense is usually objective.
If we drop crystalware, I pay (a large!) a one-time fee. If we get hospitalized and take a few months to recover, most of the hospitalization expenses will be paid by the insurer (either immediately or later).
Recovery at home represents unexpected recurring expenses. This is the worst that can happen from a financial standpoint.
We may need to pay for diapers, hospital beds, physiotherapy, Oxygen support, patient attendants, etc. And these expenses can last for months and months.
Imagine this scenario. A couple utilises 30% of their take-home pay for monthly expenses. Another 30% is allocated for investments towards their long term goals, 30% towards home loan EMI, and 10% towards miscellaneous expenses or is added to the emergency fund. They have enough life and health insurance coverage.
Every paisa earned is accounted for and budgeted. Sounds perfect! How will this couple handle unexpected recurring expenses?
There is a limit to how much monthly expenses can be reduced. Reducing the EMI is pretty much impossible. The only option is to utilize the ‘left-over’ 10% and reduce their investments if the expenses are huge. If that is not enough to cover, dip into the investments, take a loan, etc.
An unexpected recurring expense is like a wound that never dries and heals. What is the way out? Nothing can be done after the recurring expense is incurred. The only way out is to start investing early and be aware of the possibility of such expenses later in life. Naturally, luck plays a huge role. This is the only reason I have managed to hold my head above water as I manage unexpected recurring expenses after my mom fell and broke her thigh bone: Cashless Mediclaim: A Second Person Narrative.
In 2006-2007, when my late father was bedridden for more than 19 months, investing was the last thing on my mind. We are scrouging our investments to redeem and eventually fall into debt.
A few years later, when my mother was recovering from a fracture and needed post-hospitalisation care, I could not invest enough for my goals for about two years. Thankfully, I could make up the shortfall later. Not everyone would be so lucky.
In summary, young earners should be aware of unexpected prolonged recurring expenses, invest as much as possible when the going is good, and pray for the best.