You need more than just an emergency fund in your 40s. Here’s why.

Being at the top, successful, and used to having things figured out is a norm for the 40-something Indian private sector executive. But doubts are expected with the global uncertainty and news of mass layoffs by global & Indian tech giants affecting some of the most well-placed Indian professionals.

It’s like how even the best athletes go through challenging periods. Losing their income can be unimaginable for most professionals earning over Rs 30 lakh per annum in India. After all, high incomes generally imply high expenses. 

An emergency fund is generally 6 months of expenses. This can usually, if not always, be covered by four months of salary (post-tax). Having this money in a separate stable investment avenue like a liquid fund or even an FD is a personal finance gospel.

A high income comes with caveats

But when one turns 40, the devil is often found wandering in the details. If 40 means a higher income and social strata in India, it also means unavoidable expenses that are your responsibilities. And these are heavy responsibilities indeed.

Spending Rs 3-4 lakhs per year, per child is not unheard of when it comes to this demographic of 40-somethings earning salaries equivalent to their age. Since most of them work in one metropolitan city or another, simple expenses such as school fees and bus charges can reach eye-watering 6-figure amounts.

Then there are extracurricular activities that these children participate in which are a matter of fact. Not to mention coaching for the life-changing entrance exams that often cost as much or close to the school fees. 

Most of these costs are something you cannot defer. You may also have a running home loan, another expense you can’t delay. Since few parents tend to note these costs, they often get lost before making an expense list. Their recurrence is also varied as schools usually charge quarterly or annual fees.

Just an emergency fund may not be enough

The case for an emergency fund is thus a no-brainer. The Meta and Twitter layoffs are a wake-up call for even those who believe they are the best India offers. But deciding the emergency fund amount is more complex an exercise. After all, how much is truly enough?

This is why we suggest that people simply use their take-home salary as a base to decide their emergency fund amounts. Four months of take-home pay is more straightforward to arrive at as a final number than six months of expense.

However, an emergency fund with four months’ salary is “just” an emergency fund. What we would like to recommend for the 40-something high earner is a step further. Go beyond and build a confidence fund. A fund that holds enough to help you through a challenging period and do so confidently.

Your confidence fund – how big is big enough

Quite simply, go beyond the 4-month rule. Instead, build a fund that can cover annual one-time expenses and debt obligations. The idea here is not merely to be prepared for any emergency but to outlast one and do so with confidence and peace of mind.

For example, a family having 30 lakhs per year post-tax with a loan EMI of Rs. 1 lakh and two children with yearly education expenses of 4 lakhs, should  have a confidence fund of Rs. 27.5 lakhs. In case the family has only one child then the confidence fund will be 23.5 lakhs. Moving some of your investments meant for negotiable long term goals or adding your latest bonus to this fund can be an approach. 

What expenses should this fund account for? Things like your child’s annual school expenses, your home loan EMI or rent, and living expenses for a year (excluding things like what you’d spend on expensive leisure activities such as a vacation in Venice)

It’s why prudent professionals in their 40s (when the vast majority see such high incomes) often have a much higher emergency fund than what the thumb rules dictate.

But most individuals rely on their cash in a bank or existing investments since these are often significant amounts by themselves. 

	Amount	Logic behind the number
Annual post-tax earnings	Rs 30 Lakhs
Monthly earnings	Rs 2.5 Lakhs
Minimum Emergency Fund amount	Rs 10 Lakhs	your monthly income X 4
Ideal Confidence Fund amount	Rs 27.5 Lakhs	your monthly income X 11

Where should your confidence fund be invested?

While this can work in a pinch, it’s better to allocate the “confidence fund” in high stability, low-risk debt funds. Ideally, you should already have this kind of money as part of your investments and should simply relocate them to the right investment avenues with adequate liquidity. 

However, in case, you have gaps in your overall wealth, starting a SIP in liquid funds, ultra short-term debt funds, or even FDs to achieve this goal within a year or two should be your priority. How long you will take depends on your overall savings capacity and cash flow.

If you earn 30 lakhs per annum post-tax, creating a confidence fund of Rs. 27.5 lakhs from scratch will need a SIP of Rs 1.1 lakhs running for 2 years. A somewhat smaller fund of Rs 20 lakhs will take a similar amount per month and 1.5 years.

For most people in their 40s, the solution will involve a mixture of SIPs and reallocating existing investments – even if this means withdrawing from direct equity or equity MFs to the tune of the required confidence fund corpus.

The article was originally written by Anup Bansal & published on moneycontrol here on 24th April 2023.