One of the lasting images out of the rubble of the 2008 financial holocaust is that of US citizens declaring their patriotism by shopping. “I put money in the economy when I bought my 30th handbag or fifth car,” was the mantra.
As a card-holding patriotic Indian, ever wondered what our patriotic duty is? It is to move cash out of that savings deposit into more productive assets. A savings deposit of Rs100 allows just Rs70 to get lent forward due to the various prudent banking (no quibble with those) requirements. Moving this cash to a longer-term product would not only earn us a better return, but will also allow entrepreneurs to borrow more cheaply than they do now. But we hoard cash. At least 50% of household savings is in bank deposits.
And it isn’t as if we don’t desire to invest regularly, but we find ourselves falling short of that efficient ideal of clearing our savings account by a particular day of the month and then spending what is left over. The one reason that encourages us to keep more money than we need in an account that actually loses money rather than earns anything, is that dull feeling of dread that “something” could go wrong and we may need sudden cash.
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While the fears are real and justified, there are two products that can reduce the money idling away in a saving deposit. One is medical insurance. A chief worry about the future focuses on medical emergencies and the desire to have quick access to cash in case you get hit by a truck.
Of course, bosses worried about mutant trucks, too, want succession plans in place to prevent such an event from hurting work, but crazed trucks looking for people to crush are equally a good reason to buy medical insurance policies.
Cashless medical insurance is a tool to reduce the need of this cash. But while having cash is enough work done, buying, keeping and using the medical insurance needs much more effort. You need to have a good agent or planner who is one phone call away in a time of emergency. You need to keep the medical insurance cards in a place that you and the rest of the family remember and have access to. And you need to then negotiate a system of corporate hospitals that pretend to call the third party administrators and then try and get you to pay cash. But if you can do all this, the need for cash for a medical emergency goes down.
But suppose you just need cash. An efficient way to hold this cash is to lock it up in a liquid fund. Well-chosen money market mutual funds are safe and your money is moved through electronic cash transfer within one day of a redemption request. I have used liquid funds to great advantage and find them useful instruments for holding cash that I need in an emergency or for a need that will arise in the next two-three months.
Emergency cash planning needs not just a pool of money that is easy to reach but also systems put in place so that if you are run over by that bloodthirsty truck, somebody else knows where the money is and has the right to use it. By their number of years in service, banks have figured out efficiency enhancing features and joint accounts work as excellent vehicles to allow a trusted other access to cash.
When you give up this facility, you need to put in place systems that allow the same ease of cash transfer. Usually a spouse, a parent or child, you need one trusted family member into the loop of emergency cash planning.
Having your financial planner’s or insurance agent’s number on speed dial of the spouse is a good idea. So is having two liquid funds schemes, one yours and one of the spouse. Remember, this is emergency planning. And because we are talking emergency cash, it’s a good idea to have at least two liquid funds each across two fund houses.
In the rare event of a fund house having cash problems, like what we saw in October 2008 (though the quick action of regulators ensured there was no payment crisis in liquid funds), it helps to have a backup store of money.
And for those of us who like to extend the argument like a chewed bubble gum: if both spouses get hit by two lunatic trucks and end up out cold in adjacent hospital beds and both your funds go under—that’s the time you turn to a higher force; no emergency plan will save you or if there is one, then implementing it will ensure that you don’t have much of a life left. So some things are best left uncrossed. And some journeys are beyond an emergency plan—you just have to hold on tight and try and still enjoy the ride.
Monika Halan works in the area of financial literacy and financial intermediation policy. She is consulting editor with Mint and adviser, Pension Fund Regulatory and Development Authority, and can be reached at email@example.com