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My 7 Resolutions for 2015 – No I Don’t Only Want to Save & Invest. I Want to Spend & Read too!

In few days, we will enter a new year. And I am sure that most of you would be making resolutions for 2015 right now. A study says that 93% of new-year resolutions die by 23rd February. And if these are financial resolutions, then 96% die by 3rd February.

No. Don’t worry. There is no such study. I just made that up. 🙂

I know I am really bad at keeping my new year resolutions. So I won’t be harsh on myself if I am not able to keep them. But still, these are my 7 resolutions for 2015:


  • I will once again try to surrender an endowment-insurance policy, which an uncle of somebody sold me and I can’t surrender it, because of my family’s connection with that somebody’s uncle. 🙂


  • I will increase my Emergency Fund to cover 6 months worth of my family’s expenses. Currently its at a risky 4 months. 🙁


  • I will save atleast 5% of my take-home salary in my Travel-Fund. I will push my wife to do it too. 🙂 We love travelling and that requires planning and money. Apart from investing, I also rant (at times) about my travels on TripAdvisor. You can read a few here.




  • I will use my Market Crash Fund (with courage)… if markets go down by 15%-20% this year.


That’s all. I wish you all a very happy and prosperous New Year.



I personally want markets to correct in 2015…and that is because like previous few years, I will continue to be a net buyer of stocks even this year. But if you need some of the money (you invested earlier) in 2015, then I will pray for it to be a bullish year for you. I will wait and buy shares in 2016 🙂

Once again, have a happy and prosperous new year. Will say Hi to all of you in 2015 now.

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Mailbag: How do I make an Emergency Fund?

A lady reader (Aarti) asked a genuine question in the newly created Contact section of Stable Investor. 

“I don’t understand stock markets, but wait eagerly to read other articles on your website. 
Everywhere on your site, you advocate that one should make an Emergency Fund. As a novice, how should I start making this emergency fund?
I feel its very tough for me to save money. And every month end, I am almost broke. Please help.”

In this post, I would try to help the lady create an Emergency Fund in 5 easy steps.



Emergency Fund, as the name suggests is there to handle emergencies. A job loss, illness, accidents, etc. An emergency fund should have sufficient funds to cover your expenses in case you loose your job, meet with an accident or have some unplanned expenditures? 

Emergency Funds
Remember God in good times and Emergency Funds in bad times

You can take following approach to create your own emergency fund –
 
Step 1: Calculate your total monthly expenses
This is the first step and you should not get this one wrong. When calculating expenses, it is necessary to calculate your family’s expenses and not just your own. This should include everything from expenditure related to food, rent, loan repayments (EMIs), transportation (fuel) costs, monthly insurance premiums, monthly investments (SIPs in mutual funds), medicines, telephone bills, electricity & water bills to more discrete expenditures like eating outs, gifts, festivals etc.
 
Step 2: Decide how much you would like to save
This totally depends on your level of comfort. There are different opinions about how much money you should put in an emergency fund: 3 months, 6 months or 12 months worth of expenditures. But don’t worry about others. Its your emergency fund and only opinion which matters is yours. Ask yourself how much you would need to feel secure, and make that your target for an emergency fund.
 
Step 3: Open an account
Once you have decided how much you need to put in your emergency fund, it is time to decide where to keep your money. One major requirement of emergency funds is liquidity. This means that you cannot park your money in mutual funds, stock markets, gold or other illiquid assets. The best option would be to open a Savings Account. You should open an account exclusively for this emergency fund. Or otherwise, you would be tempted to dig into your emergency fund account for non-emergency requirements. Though saving accounts don’t offer much as interest, it is important to understand that what they do offer is ‘liquidity’. Some banks offer close to 6-7% on Savings Account, which is quite decent considering the liquidity these savings account offers.
 
Step 4: Determine how much you can save regularly
Emergency funds aren’t built in a day. It takes time and regular savings on your part. Analyze your finances and determine how much you can afford to put towards your emergency fund every month. Don’t worry if you start small. Even a small amount will do as when you start saving, you realize the importance of such a fund and the risk of not having such a fund.
 
Step 5: Automate it
If possible, make arrangements to allow automatic transfer of funds to this emergency account. This can be done on a pre-selected date every month. This is advisable as it brings discipline in saving and also prevents you from making any rash expenditure as you would always have the thought of automatic-emergency-fund transfer at the back of your mind. 🙂 

And it is my personal experience that if you don’t have to think about it, savings are much easier.
 
5 steps to create emergency fund

Dead Monk’s Advice: Don’t risk your emergency fund by going after higher returns.

Many of your ‘well-wishers’ and so called financial experts will tell you that you can easily earn more than 7% if you are ready to invest in MFs, stocks etc. But beware. Do not listen to them. 

Why?

Read the following scenario…
 
A little common sense would tell you that one should not take risks with emergency funds. Suppose you invest you emergency fund in stock markets. During recession, you lose your job. It is common knowledge that during recession (when you lose your job), the markets would be down, i.e. your investment would be quoting at prices lower than your purchase price. Hence, you would have to book loses in case you want to use your emergency fund. This would not have happened if you had stuck to safer savings bank account.

As of now, you might feel that you are not in some kind of emergency situation…
 
dont wait start now
 
Suppose you earn Rs 50,000 every month. Your monthly expenditures are Rs 25,000. You want to build an Emergency Fund of 6 months, i.e. (6 Months x Rs 25,000 = Rs 1,50,000). Assuming, you are able to put away Rs 10,000 every month, it would take you 15 months to create an adequate emergency fund.
 
emergency fund time required
Timeline for creating an Emergency Fund – (Click To Enlarge)
So start now as 15 months is a long time and you would not like to face an emergency without having a fund to handle it, isn’t it?

3 things to do before investing in stock markets


All of us want to make money in stock markets. And given a chance, we would love to become Warren Buffet (lol) 🙂.  But we believe that stock markets are inherently risky. And when dealing with risks, one should be cautious to start with. According to us, there are 3 very important things which should precede investments in stock markets –

Build an Emergency Fund
The goal of emergency fund is to have around 6 months of expenses in savings. This can be for more than 6 months too but minimum we suggest is 6 months. The emergency fund is not an investment. It is simply a pool of funds which can be dipped into in case of emergencies. One should not risk emergency funds to earn higher interests. This fund should be parked in only the most liquid of assets like Savings Account. Though this may seem like a lot of money being used to earn minuscule returns, the fact is that it helps in building personal financial security. If you decide to invest in stocks before having an emergency fund, you may have to sell your investments at a time when markets are down and you would then be forced to lose money.

Pay off high interest debt
Paying off high interest debt, especially those of personal loans and credit cards is a must. Many such debts have a 15% + rate of interest. And since it is nearly impossible to find a guaranteed return like that in stock market, it makes sense to pay off these high-interest-rate debts. (One can continue to have long term debts like home loans, etc even when entering the stock markets)

Understand yourself (& your risk appetite & investment time horizon)
Stock markets are not for everyone. If one is not comfortable with occasional rise and fall in portfolio value, then stocks can give sleepless nights. One should never invest more than one can afford to lose in the short term. Before investing even a rupee, one should understand that there are 2 type of risks associated with stock investing; namely company risk (possibility of company going down) and market risk (possibility of overall market going down). There is no way one can avoid these risks. But these can be reduced. And as they say, it is not about avoiding risk that matters, but how to manage the risk that is more important. Another must do for future investor is to figure out why they are investing? Answer to this question itself will give them a direction on where to start. 

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