- Date : 03/05/2023
- Read: 4 mins
Looking for financial security in your 40s? Want to achieve your goals with ease? Discover the 'confidence fund' and learn how it can help you!
How to do financial planning for unexpected circumstances?
As you enter your 40s, your financial responsibilities weigh more heavily. A sudden job loss or unexpected expenses can be devastating. While an emergency fund is a good start, more is needed. Building a 'confidence fund' tailored to your age and lifestyle can help you achieve your financial goals and feel more secure in your future. In this article, we'll explore why a 'confidence fund' is crucial to your financial planning and how you can get started today.
A survey conducted by Finology Ventures called 'India's Money Habits' has uncovered that more than 75% of Indians lack an emergency fund. This situation is putting them at risk of not being able to make their equated monthly instalments (EMIs) if they were to suddenly lose their job or suffer any other form of income loss. The survey collected data from over 300,000 Indians, and it revealed that one in four Indians would not be able to survive for more than a month without a job. Furthermore, the survey found that a third of Indians do not possess either health insurance or an emergency fund. Indians often depend on their parents and friends to be their emergency fund.
What is an emergency fund?
While opinions may vary regarding emergency funds, the generally accepted and more practical definition is as follows: an emergency fund should cover six months of expenses, which can usually be achieved with four months of post-tax salary. It is widely recommended to keep this amount in a separate, stable investment avenue, such as a liquid fund or a fixed deposit, as it is considered a fundamental principle of personal finance.
Also Read: Why Create Emergency Fund Before Starting To Invest?
What are the minimum expenses that a family has to bear?
In metropolitan cities, upper-middle-class parents in their 40s spend INR 3–4 lakhs annually per child on school fees, bus charges, extracurricular activities, and entrance exam coaching. Additionally, many at this age have begun paying EMIs for their dream homes while still paying rent. Monthly expenses such as household, electricity, water, gas, telephone, internet, and other miscellaneous expenses must be addressed.
In these unpredictable times, relying solely on an emergency fund may not suffice. Recent layoffs at top corporations, including Apple, Meta, Twitter, Microsoft, Google, Amazon, and Zoom, have been a serious wake-up call for even the most optimistic individuals. While having six months' worth of expenses saved for emergencies is sound financial advice under normal circumstances, there may be situations when an individual experiences prolonged unemployment. Uncertain economic times, fears of a recession, global conflicts, and other unexpected events may lead to short-term job losses.
Considering these uncertainties, it is advisable to make your emergency fund with a confidence fund. A confidence fund is an additional savings fund that provides for financial responsibilities and peace of mind during prolonged periods of unemployment.
How big should a 'Confidence Fund' be?
It is difficult to provide an exact figure for the ideal size of a confidence fund. However, on average, it should be sufficient to support you for a full year, including all of your expenses and debt payments. In other words, it should be equivalent to your post-tax annual income. Consider adding any unexpected income, bonuses, or contributions towards long-term goals to this fund. The purpose of the confidence fund is to cover all essential expenses for a year, including expenses related to your children's education, such as annual fees, transportation costs, and private tuition fees (if applicable), as well as rent or mortgage payments, EMIs, and daily living expenses.
Allocate your "confidence fund" to low-risk investments like debt funds. If your financial situation is insufficient, initiate systematic investment plans (SIPs) in liquid funds, ultra short-term debt funds, or fixed deposits (FDs) to meet your objective in one or two years based on your savings and cash flow. Both SIPs and FDs prove to be of great help in unfortunate circumstances.
Also Read: Are You Self Employed? Here's How To Create A Larger Emergency Fund
In your 40s, financial responsibilities weigh heavily, and unexpected expenses or job losses can be devastating. An emergency fund is a good start, but a 'confidence fund' tailored to your age and lifestyle is needed. Recent layoffs at top corporations are a wake-up call for employees across the world. The confidence fund should be sufficient to support you for a full year, including all expenses and debt payments, and investing it in relatively low-risk vehicles is advisable. In shortfalls, prioritising SIPs in liquid funds, ultra short-term debt funds, or FDs can help achieve the objective in a year or two.
How to do financial planning for unexpected circumstances?
As you enter your 40s, your financial responsibilities weigh more heavily. A sudden job loss or unexpected expenses can be devastating. While an emergency fund is a good start, more is needed. Building a 'confidence fund' tailored to your age and lifestyle can help you achieve your financial goals and feel more secure in your future. In this article, we'll explore why a 'confidence fund' is crucial to your financial planning and how you can get started today.
A survey conducted by Finology Ventures called 'India's Money Habits' has uncovered that more than 75% of Indians lack an emergency fund. This situation is putting them at risk of not being able to make their equated monthly instalments (EMIs) if they were to suddenly lose their job or suffer any other form of income loss. The survey collected data from over 300,000 Indians, and it revealed that one in four Indians would not be able to survive for more than a month without a job. Furthermore, the survey found that a third of Indians do not possess either health insurance or an emergency fund. Indians often depend on their parents and friends to be their emergency fund.
What is an emergency fund?
While opinions may vary regarding emergency funds, the generally accepted and more practical definition is as follows: an emergency fund should cover six months of expenses, which can usually be achieved with four months of post-tax salary. It is widely recommended to keep this amount in a separate, stable investment avenue, such as a liquid fund or a fixed deposit, as it is considered a fundamental principle of personal finance.
Also Read: Why Create Emergency Fund Before Starting To Invest?
What are the minimum expenses that a family has to bear?
In metropolitan cities, upper-middle-class parents in their 40s spend INR 3–4 lakhs annually per child on school fees, bus charges, extracurricular activities, and entrance exam coaching. Additionally, many at this age have begun paying EMIs for their dream homes while still paying rent. Monthly expenses such as household, electricity, water, gas, telephone, internet, and other miscellaneous expenses must be addressed.
In these unpredictable times, relying solely on an emergency fund may not suffice. Recent layoffs at top corporations, including Apple, Meta, Twitter, Microsoft, Google, Amazon, and Zoom, have been a serious wake-up call for even the most optimistic individuals. While having six months' worth of expenses saved for emergencies is sound financial advice under normal circumstances, there may be situations when an individual experiences prolonged unemployment. Uncertain economic times, fears of a recession, global conflicts, and other unexpected events may lead to short-term job losses.
Considering these uncertainties, it is advisable to make your emergency fund with a confidence fund. A confidence fund is an additional savings fund that provides for financial responsibilities and peace of mind during prolonged periods of unemployment.
How big should a 'Confidence Fund' be?
It is difficult to provide an exact figure for the ideal size of a confidence fund. However, on average, it should be sufficient to support you for a full year, including all of your expenses and debt payments. In other words, it should be equivalent to your post-tax annual income. Consider adding any unexpected income, bonuses, or contributions towards long-term goals to this fund. The purpose of the confidence fund is to cover all essential expenses for a year, including expenses related to your children's education, such as annual fees, transportation costs, and private tuition fees (if applicable), as well as rent or mortgage payments, EMIs, and daily living expenses.
Allocate your "confidence fund" to low-risk investments like debt funds. If your financial situation is insufficient, initiate systematic investment plans (SIPs) in liquid funds, ultra short-term debt funds, or fixed deposits (FDs) to meet your objective in one or two years based on your savings and cash flow. Both SIPs and FDs prove to be of great help in unfortunate circumstances.
Also Read: Are You Self Employed? Here's How To Create A Larger Emergency Fund
In your 40s, financial responsibilities weigh heavily, and unexpected expenses or job losses can be devastating. An emergency fund is a good start, but a 'confidence fund' tailored to your age and lifestyle is needed. Recent layoffs at top corporations are a wake-up call for employees across the world. The confidence fund should be sufficient to support you for a full year, including all expenses and debt payments, and investing it in relatively low-risk vehicles is advisable. In shortfalls, prioritising SIPs in liquid funds, ultra short-term debt funds, or FDs can help achieve the objective in a year or two.
