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Emergency behaviour

The pandemic has taught us a lot of things and our attitude towards emergency funds should be the biggest lesson

Emergency behaviour

I'm sure that most of us are a little tired of this 'lessons from the pandemic' business by now. From health to work to cooking to doing one's own haircut, there are a lot of lessons we have learnt, or supposedly should have learnt during these months. I don't know how many people have been able to learn how to give themselves presentable haircuts but the area of life that has presented the biggest learnable and re-learnable moments is personal finance. Of course, with the exception of health and sickness, which is not my brief here.

What distinguishes personal finance from say haircuts or cooking is that you are actually likely to need these lessons all the time even when the pandemic is long gone. In fact, the whole point is that we should have been doing all these things all along.

Quite obviously, the most important thing that the pandemic has taught us is that emergencies do happen, and at a scale that is much wider than one normally expects. That having some emergency funds should be the cornerstone of any sensible personal financial strategy - that much everyone understands, even though while life is going on normally, it's hard to actually feel that a real emergency can actually happen.

What has tripped up many people is that here was an emergency that was happening simultaneously to almost everyone one knew across one's community, city, country and indeed, the world. For many people, part of their emergency preparedness is an implicit belief that their friends and family will not have an emergency simultaneously with them. Businesspeople implicitly feel that day-to-business will continue. The idea of everything hitting an emergency in sync was unthought of.

However, it is a fact that through the last 100 years or so, in almost every part of the world - definitely in India - such society-wide emergencies have happened. More than anything else, that's the key message of 2020: that we must re-evaluate all our ideas about how quickly things can go from bad to worse. After all, many of us are re-evaluating our investments not just because the investments themselves have changed, but more than that, our circumstances have changed. Or, even if they have not actually changed, we are apprehensive that they may change for the worse in the future. It's just that the maximum sudden downside that modern life is capable of seems steeper than we had suspected.

So start by re-evaluating the basics, which are well encapsulated by the sequence: emergency money -> term insurance -> tax savings -> short/medium term -> long term/retirement -> post-retirement. The actual uses that the money is put to can be many, from children's education to housing and vacations and what not, but it can all fit into this framework. During 2020, we have all had to take a careful second and third look at the first two items in the list, and the general conclusion has been that we have all upgraded our idea of how much emergency money we need to keep in hand and how much term insurance we should have. So, the first order of things is to upgrade these and everything else comes later.

As an investment analyst who looks closely at businesses, I can't help noticing that the pandemic has brought forth a most interesting similarity between the personal financials of individuals and businesses' fortunes. The wise thing to do, whether for individuals or companies or governments, is to build reserves when the times are good. Instead, the modern way has become for all three to borrow as much as possible against future income and growth. When times go bad, the results are there for all to see, and so are the lessons for the next pandemic, or whatever other surprise the future holds.