Ramanath Kumar is a 32 years old diploma engineer currently employed in an IT firm in the southern part of India. After consistent persuasion from his parents, he finally got married and now he is a proud father of a two years old cute daughter. Life was smooth and EMIs for the home loan and car loan was flowing on schedule until her wife met with a serious road accident a couple of weeks ago and got admitted to a private hospital.
Fortunately, the wound was not that much serious and Smita, Ramanath’s wife was discharged after four days. Ramanath jovially paid the hospital bill worth ₹60k at the time of signing his wife’s discharge form when his two years old daughter was busy cuddling with her mother.
Until that accident, Ramanath never missed a due date, but this time after meeting the hospital bills and EMI on schedule she could not manage to honor his ₹20K per month SIP. He started that SIP with long-term investment outlook to finance her daughter’s higher education. At the time of planning this SIP, he promised to himself that he won’t miss a single installment, but he failed.
Ramanath introspected that he did everything right but forgot to set aside a certain sum of money in the emergency fund to meet emergency needs and renewing the yearly mediclaim policy. He also observed that he belongs to the low-income earner group thus leaving not much space to spread his leg.
In the low-income earner group, the primary obstacle for achieving a long-term financial goal is a very simple problem. The problem is when few minor non-recurring cash outflows happen in a short period of time, it stretches too far the expenditure side of the budget. To respond for the sudden expenditure spike, the small income earner is naturally forced to curtail his investment amount to accommodate the extra cash outflow.
Initially, he compensates the over-due investment amount in the next month amidst pressure on the budget. He keeps fixing it for the first couple of relapses, but when this type of uncertain financial outflow had already happened multiple times, the investor gradually loose necessary motivation to fix it. And one day he gives up investing regularly without even noticing that he was swayed away from his financial goal.
An achievable financial goal is the result of a well thought out financial strategy, and every strategy on earth can be perceived through chess. Rule of chess considers pawn the least valuable piece, but a right combination of pawns at the right position may turn deadly to the king. In finance too, multiple insignificant financial outflows may form a combination which can derail a person’s long-term financial goal.
To safeguard the long-term financial target, a well-maintained emergency fund is necessary. An emergency fund will absorb any unwanted mild to moderate financial shocks whenever such an incident occurs. We must know that the pawn is dangerous only when they are in combination. Therefore, A well thought out financial plan will not only ensure some extra space to absorb sudden financial shock but also deploy a mechanism to handle minor to moderate financial issue within a short span of time, so that multiple small overdue financial outflows do not get accumulated over time.