- Wealth PMS
In my first post, I’d asked what you would do if you lost your job. Not too many responses came about, and I think that’s because people don’t think such a thing will happen to them. But obviously they all sympathize.
I won’t claim to be different. There are just a few things that come to mind.
That Emergency Buffer
You need six months of expenses. I would even say a year.
And don’t get stingy with expenses. Don’t take the month of November and say I spent just Rs. 35,000 this month, so one year = 35K * 12 = <whatever>. You have a number of one time expenses or those that don’t reflect in November. Annual holiday. School fees. Insurance premium. Car maintenance. Medical bills. That TV or mobile or laptop you buy every year. All that, added up.
This money needs to be liquid. Either in fixed deposits or liquid/short-term debt funds.
If you don’t have this buffer in place, don’t go around thinking of which SIP to make or which equity fund to invest in. Build that buffer first.
Planning for desperation
If you don’t have that emergency buffer, then you’re desperate.
If you had that buffer and it is close to running out, you’re desperate. If you have a buffer and have cut through it slowly, reducing your discretionary spend so much that you are left with just absolute necessities, you’re desperate.
In times of desperation you will need to take whatever job you get. The ego of salary parity with the last job, or the same designation, all that goes out the window. I have had to acknowledge a situation of desperation in the past, and I know I was unprepared. If there is a next time I’ll recognize the signs better and spend less time in denial.
Through my bachelor life, I didn’t care about losing my job – even if I worked at a company I owned. (Oh you can lose those too). The thing is – I was employable, and I didn’t think the economy would tank, and that I would always be able to get a job. Because if it comes down to it, I would work harder, longer, and smarter than enough people to land a job. It’s remarkable how much more confidence you can get if you will take any job, any role, any designation.
What if you still don’t get a job? You have to be able to borrow. After all, people still need to eat and live and clothe themselves.
Preparing to Borrow: The OverDraft Account
Borrowing from friends or family is okay, and is used often. Moneylenders are the last resort – they charge 2% to 4% per month, usually with collateral.
But there are other, more reasonable avenues. If you are a low debt person, then you can borrow against securities you own, or a property, or gold, or even your endowment insurance policies. For this, you can set up an “overdraft” account that will give you access to money if you ever need it.
The overdraft is like this:
So if you need Rs. 1 lakh for a month, and then pay back Rs. 75,000 next month and 25,000 the month after, you get charged interest on:
The OD will help you get access to cash fast, should you get desperate. The interest costs can be 18% or more – but in a crisis, such accounts are really valuable.
Remember, you still need to pay the interest on the OD every month. If you haven’t maxed it, you can just take the sum out of the OD and pay it back as interest.
Fighting fit, with a break
If you ever get fired, consider taking a month off. You can’t be in such a bad shape that you can’t take a single month off. Get out there and do things you’ve always wanted to do but never done, like watching at 12 noon movie, or climbing a mountain or what have you.
And then come back with a vengeance.
…is not something you do until you find a better job. The lure of the tag, of starting something, is attractive. And even more so now with all the hoopla around it, the events, the prizes, the fact that some people get funded by Venture Capitalists for just breathing and so on.
Starting up is a life decision. You trade a cash flow (salary, or annuity) for an asset that you hope will appreciate, and eventually provide cash flow or get bought by someone bigger. Big success stories are rare, and the stress takes a lot more out of you than a regular job will. No, a startup isn’t what you do between jobs. It’s what you do because you want to do it.
I left my second job in 1998 – because I wanted to start a company, which I ran for seven years. It’s what I wanted to do. I was not immensely successful, but if you put me back there, I would still start up again. I’ve been on my own the past two years hunting to make the next venture a success. It is a full-time job, not something I think of as a “hobby” or “pastime” or “temporary designation”.
What about those EMIs?
If you can pay, pay. If you can’t pay, you can renegotiate with your lenders, asking for some time to pay the money back. Get all your documentation in written – if you are making phone calls, record them. Escalate matters to the highest official possible.
Lastly, if you have to stop paying, be prepared that the lender will repossess what you borrowed against (your house, your car etc.).
But remember that a default will hurt your credit later, as the lender will enter a note into your CIBIL record. So default at the risk that you may not get a loan again easily.
Do not fear, though. Banks are going to be just as worried about you defaulting, if there is a crisis and too many people have lost their jobs. You can use the situation as leverage to get the best deal that you can. (Don’t be ashamed – the banks will rip your heart out if it was legal.)
EMIs are necessary, but there are various options to change them – you can back-load them (pay more interest and principal after a couple years, pay lesser now). You can ask to only pay interest for a few months before you resume paying the principal. Only as an ultimately desperate person will you ever sell your house to pay off the bank – and you can set up your options so that you’ve tried everything else.
Why aren’t you telling me to cut expenses?
I could, and this is advice you will get all over the internet. Cut your expenses, hunker down, don’t eat out, sell the car and take public transport, change clothes only every other day and so on. Yes, you can do this. But this is easy preaching. It’s not practical because you will do it anyhow, if you have to. I would get really pissed off if anyone comments that I should live life in a different way just because I haven’t had a salary in two years, or if I have a bad month trading. So I’ll give you that respect. There is no point in my being all condescending.
That is not the way I operate. What you need is another source of income, and you’re looking for it. Cutting expenses is temporary and defeating. Sometimes doing so gives you a false sense of security – such as: if I cut this and that, I can survive two years! Yes, but like the joke goes:
Preacher: If you stop drinking, the women, the eating out, sweets, salty and fried things , you’ll live to be a hundred!
Patient: But what’s the point if I can’t do any of them? (“Toh jee ke karunga kya?”)
Don’t do it unless you absolutely have to. Life a normal life. Travel, eat, drink and buy clothes like earlier. The idea is to get your emergency buffer so that you can be normal while you get your life back in order.
If you were, on the other hand, inflicted with a life threatening disease that would likely make you incapable of doing a job, I would then say cut down expenses as much as possible. But not…okay, you get the picture.
This is so depressing.
But losing your job is depressing enough. I’m sorry to throw out gyan like this but there is no point getting depressed. We live in a capitalistic society which gave us great money and opportunities on the way up, and we’ll have to live with the crap it hands us (like getting fired just as easily) on the way down.
You don’t have to change your lifestyle, or grow a beard and smoke pot. (It might help, but that’s not the point) If you spend a little time planning your emergency buffer today, it gives you time during your emergency to consider some of the other options as well, without cutting out your gym subscription.
It’s not personal, it’s business. And your reaction to it has to be business-like as well. It might help if you know that it’s not the end of the world – and I hope this post helps.