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It goes without saying that life is a risky journey. Whatever we venture into, despite good intentions, can backfire. The same applies to our finances. We invest in various asset classes, some calculative and some speculative. Risk is an inherent part of investment, although the degree of risk may vary. When faced with such a risk, what we can call as a ‘financial crunch', how do we take care of our necessities? If you are part of a family, you may need money for rent, school fees, food, electricity, and so on. Or your work involves a gadget like a smartphone or a laptop and it decides to call it quits one day. These gadgets are expensive and replacing it is a sudden unforeseen expenditure. Maybe you're a bachelor or bachelorette and don't have the burden of familial expenses, but you still have needs for yourselves. Say you have a loan to pay and you lose your job. You don't want the bank to seize your assets. All of these situations sound like a financial emergency. This is where your emergency fund comes in to save you, but only if you have one.

An emergency fund is your backup money that is created when you understand that you can expect the unexpected at any time. It is the financial lifeline in times of an economic downturn in our personal lives. An emergency fund protects against unforeseen expenses, reduces financial stress, prevents high-interest debt, and maintains financial independence. Additionally, it supports long-term financial goals, and enhances employment flexibility.

Unfortunately, the percentage of people prepared for such emergencies are miniscule. Data from the USA suggests that only 17% of people had at least 6 months of emergency funds and only 9% of people had at least 7-12 months of emergency funds to cover for their family’s expenses.

In India, only a meagre 24% were financially prepared to face an emergency.

All of us need an emergency fund. There are no two thoughts about it. The big question is how do you build your emergency fund and where do you keep this money?

How do I Build an Emergency Fund?

The financial needs of every person is unique. Therefore, the amount needed to keep aside for emergencies would differ from person to person. In building an emergency fund, you would have to calculate all the unavoidable expenses that you would require for a month. Avoidable expenses like dining in an expensive restaurant, vacations and movies need not be included, because they're, obviously, unnecessary during a financial crisis. Stick to the money you would require for a month to fulfill your needs and not wants. Let's call this amount X. Atleast 6 and preferably 12 times X is what you should keep as an emergency fund. That is you should have enough money to sustain all your needs including your family’s needs, if they are dependent on you, for 6-12 months.

You are unlikely to build in one month an emergency fund that lasts for 12 months. Therefore, the best thing to do is to keep building it as you earn till you reach your desired calculated amount (6X to 12X, mentioned earlier). For example, if your calculated emergency fund requirement is 1 lakh rupees, try to set aside ₹10,000 per month till you reach your target. A higher portion may have to be kept aside monthly for those with a higher emergency fund requirement.

Where do I Keep This Emergency Fund?

First and foremost, an emergency fund is not created to grow your wealth so don't expect your money to double or triple. It is made to act as cushion against a stressful financial situation. In this regard, an emergency fund should always be maintained in safe or relatively safe assets from where you can withdraw the amount easily. But do remember that you also don't need to use an emergency fund frequently. This means you could keep a portion of the fund in safe asset classes that offer slightly higher interest rates than a simple savings bank account.

Here are some of the asset classes that could be considered to store (for quick and easy retrieval) your emergency fund.

1. Savings account

Your savings account is the best place to store a portion of your emergency fund for instant access. You could use UPI/Google Pay (linked to your savings account), your debit card or simply withdraw cash from an ATM.

2. Liquid Mutual Fund

A liquid mutual (debt) fund is called so because your money is, well, liquid here. You can withdraw at any time. They invest in bonds or debt instruments, including government treasury bills in India, that mature in 91 days. The credit quality of the debt instruments in a liquid fund are usually excellent. This makes both credit risk and interest rate risk minimal, leading to low volatility, providing a relatively safe asset class. The interest here is slightly higher than that received from a savings account and may occasionally be at par with the interest on fixed deposits. There are no additional charges for withdrawal. These funds have a minimal expense ratio and you are taxed for these funds only at the time of withdrawal, unlike a savings account or fixed term deposit account where the interest is taxed annually.

3. Fixed Term Deposit

Although not as liquid as a savings fund or a liquid mutual fund, fixed term deposits are still an option to save a fraction of a your emergency fund corpus. They occasionally give inflation beating returns (which may get cut down further post tax). They can be redeemed on any business day even before maturity although you may have to pay a penalty for early withdrawal. The money is usually tied to banks and in India, term deposits upto 5 lakhs rupees in a bank are insured by Deposit Insurance and Credit Guarantee Corporation as dictated by the Reserve Bank of India.

4. Arbitrage Mutual Funds

Arbitrage mutual funds are a type of mutual fund that aim to generate returns through arbitrage opportunities in the equity markets. Arbitrage involves simultaneously buying and selling the same asset in different markets to take advantage of price differences. Imagine there's a stock of a company, ABC. In the cash market (where you buy and sell stocks immediately), the price of ABC stock is ₹100. In the futures market (where you agree to buy or sell stocks at a future date), the price of ABC stock is ₹105. The arbitrage mutual fund manager can buy in the cash market and sell in the futures market to gain a profit.

This strategy, which involves buying and selling simultaneously, minimizes the risk of losing money due to market fluctuations. Arbitrage funds fall under equity mutual funds and hence, you are taxed only at the time of redemption. A portion of your emergency fund could be allocated to arbitrage mutual funds to potentially earn higher returns than a regular savings account, while still maintaining a low risk profile. Redemption of money takes longer than a regular savings account, liquid fund and fixed deposit. Therefore, don't invest your entire emergency fund corpus here even if it is to save taxes.

Remember to Replenish your Emergency Fund

We may land up with a financial emergency at some point in our lives and either exhaust or partially exhaust our emergency fund. During the COVID - 19 pandemic, nearly 14% of Americans wiped out their emergency savings. If you face such a situation, you may eventually get back to receiving a steady income. When that happens remember to replenish your emergency fund at the earliest to prepare yourself for the next financial emergency.

One extremely important piece of advice would be to never use your credit card when you have a financial emergency. It is only going to add to your financial burden due to the exorbitantly high interest rate on default. So start building an emergency fund, diversify it among various ‘safe’ asset classes and sail through a financial crunch without any major setbacks.

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⚠️Disclaimer: This newsletter is purely for informational purposes only and does not constitute financial advice, investment recommendations, or an offer to buy or sell securities. Investing in equity markets carries inherent risks, and past performance is not indicative of future results. Readers are encouraged to consult with a qualified financial advisor and conduct their own research before making any investment decisions. The author and publisher of this newsletter are not responsible for any financial losses or decisions made based on the information provided herein.

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It is easy to dream about financial independence, but to achieve it, necessary sacrifices may need to be made. This includes trimming down on our wants and focusing on our needs.

In today’s world, our needs are not just limited to food, clothing and shelter. Luxuries in the past have become necessities now. Think about it. Laptops, mobile phones, and cars among others have transitioned from being a luxury in the olden days to being a necessity today. Even with the additional necessities, there is one thing that we can practice to attain financial independence early - frugal living.

What is Frugal Living?

Frugal living is mindful spending, resourcefulness, and a commitment to living within one's means. It is a kind of minimalism, but the opposite isn’t true. Minimalism means owning less but what you own may be expensive. Frugal living is the art of spending below your means. In other words, it is the art of being thrifty. You own all that you need, but your expenditure is capped at things that are necessary.

A thrifty spender realizes the value of assets and hence, restricts purchase of luxury items that depreciate in value over time. Frugal living is not about cheapness or austerity but rather involves making intentional choices about how you allocate your resources. Frugality priorities value over price, focusing on what truly matters, and minimizing waste.

Separate your Needs from your Wants

Frugal living separates needs and wants. It restricts spending on what is unnecessary. Needs are necessities. Wants are desires over and above needs. Here are a few examples.

1. Buying a cheaper car with better mileage, resale value and a larger network of service centres over a car that compromises these utility perks for luxury alone.

2. If you visit a mall during a sale, you find a collection of discounted clothes. It's great to buy during a sale. But the aggressive slashing of prices leads to purchase of a large quantity of clothes, more than what is actually needed at the time, potentially leaving you with an empty wallet at the end of the month.

3. Smartphone companies churn out newer models with improved features every year. If your use for a smartphone is to call, text, read emails, reply to them and nothing more, a ridiculously expensive flagship phone becomes an unnecessary purchase. This phone will have a gazillion features that is best suited for power users like tech reviewers, gamers and those who need it for office tasks. With a limited use case, a pricey smartphone is a depreciating asset.

In all the above examples, there was a need. But to go for the expensive item to satisfy that need becomes a want. In his book, The Richest Man in Babylon, George S. Clason writes,

That what each of us calls our necessary expenses will always grow to equal our incomes unless we protest to the contrary.

You need a shoe, but do you need that expensive shoe? You need a watch, but do you need that expensive one? In frugal living you don’t deny your needs, but you set limits to them so that they don’t become wants.

This does not mean that you shouldn't enjoy life. Purchases restricted to needs today means that you have more money to travel the world, enjoy a meal at a fancy restaurant, purchase your dream house earlier, start a business, or donate to a charitable cause. Restrict unnecessary wants today to fulfill your amazing bucket list that adds meaning to life.

What do you gain by frugal living?

One of the primary benefits of embracing frugality is the attainment of financial freedom. By living below your means and practicing prudent spending habits, you can reduce debt, increase your investments, complete building your emergency fund early, retire financially healthy, and grow your wealth over time. Moreover, frugality reduces financial stress and anxiety, allowing you to focus on what truly matters and cultivate a sense of contentment in your lives.

By the time you retire, your living expenses and health related expenses are going to rise. You may have life goals that you’d like to fulfil. Invest that extra money today, the amount that you did not splurge, to help yourself reach financial independence early. Recollect the story of the ant that collected sufficient rice in summer to live and eat comfortably during the rainy season.

Also, by living frugally, you can build a safety net for yourselves and your families, protecting against unexpected setbacks or economic downturns. This proactive approach to financial planning fosters resilience and adaptability, enabling you to weather life's challenges with confidence.

Frugality also encourages creativity and resourcefulness. You may find innovative ways to meet your needs without overspending. You may perform DIY tasks, like cleaning your house, ironing your clothes, and cooking your own meals which in turn increases your activity, thinking, wealth and even your health. There is learning and self-improvement which happens surreptitiously that leads to mental satisfaction.

Why not enjoy life? You never know what happens tomorrow.

Yes, we can’t predict the future which is exactly the reason why frugal living is bliss. What if you buy that expensive phone and it gets stolen the next day? The more expensive it is, the greater your regret, especially if it is your hard-earned money that you’ve put into purchasing it.

With frugal living you have control over your finances. You know where and how your expenses go. If you need to invest more in learning, you can cut expenses on ordering junk food home. If you need to invest to build an emergency fund, you can reduce splurging on clothes that you don’t need now. The list is endless, but you get the point.

Warren Buffett, a value investor and one of the richest men in the world, practices frugal living. He has a car, but not a luxurious one. He lives in the same house that he purchased in 1958, which isn't a super luxury villa. It's not because he can't afford it. It's because he has what is necessary for him. Due to his frugal habits, he has allocated a sizeable portion of his wealth to philanthropy which serves a greater purpose than buying fancy cars and luxury houses.

Frugality is not about deprivation or sacrifice but rather about living intentionally, aligning our spending with our values, and embracing a philosophy of enough, something we struggle to figure out. It is about making conscious choices to spend money wisely, prioritize needs over wants, and find satisfaction in simplicity.

If you would like to live a frugal life, the next time you desire to purchase that expensive dress or that limited edition shoe, ask yourself this question: is it a need or is it a want?

What are your thoughts on frugal living? Let me know in the comments below.

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When I first learnt about the stock market, experts and analysts wrote and spoke at length about bull and bear markets. At the time, these terms were new to me, and I was lost in a sea of financial jargon. As I read more, I realized that bulls and bears weren't the only animals here.

In this post, I dive into the ‘animal’ terminologies in the stock market and what they mean to an investor.

Bulls

Most of us would have heard news articles that go like ‘Bulls brought the market to new highs’ or ‘Bulls emerged winners in today’s market session’. They are investors filled with optimism due to a positive outlook of the market as a result of favourable economic and geopolitical factors. In such a scenario, these investors keep buying shares of stocks in large numbers resulting in the rise of the stock market index. Coupled with this is minimal selling of shares and so, the price of shares keep going up. In simple words, when buyers are far greater than sellers, we have a bull market. These confident buyers are called bulls.

Bears

A bear market is the direct opposite of a bull market. Investors are pessimistic about growth of the market due to poor economic outlook, market scams, geopolitical tensions (like wars) and natural disasters (including pandemics like COVID - 19). Big investors end up selling their shares and stock market indices drop down due to fall in the price of shares. This is coupled with minimal buying of shares. In other words, when sellers are far greater than buyers, we have a bear market. These big sellers are called bears.

Where did the name bull market and bear market come from?

This was the natural follow up question I had when I came across these terms for the first time. And why bull or bear? The answer to this question is uncertain. One major theory is the way in which these animals attack. The term "bull" is associated with the charging behavior of a bull, which thrusts its horns upward. The term "bear" is associated with the swiping motion a bear makes when attacking, which is downward.

Another theory on the origin of the term bear came from the proverb warning that ‘it is not wise to sell a bear's skin before one has caught the bear’. In the late 17th century, traders who speculated a future decline in the price of bear’s skin, sold them before actually catching the bear. They expected to profit from the difference between the cost and selling prices - a spread. This metaphor may have been extended to describe a market where prices were falling.

That’s not all! There’s more!

As mentioned earlier, bulls and bears aren't the only animals in the stock market. There's a whole miniature zoo out there. They’re not as significant as bulls and bears but it’s always good to know them. Here goes.

Rabbits

They do intraday trades (buying and selling shares on the same day based on intraday fluctuations in share prices). They aim for a quick buck which can be extremely risky for the untrained.

Turtles (or Tortoises?)

There’s a bit of a confusion here. Some sources say turtles while others say tortoises. Did you know that all tortoises are turtles, but all turtles are not tortoises? That’s a topic for another time. Whether turtles or tortoises, they are disciplined long term investors who are unfazed by short term market swings. They invest and wait patiently for the magic of compounding. They believe that slow and steady wins the race.

Chickens

You guessed it. They are the ones who are fearful of market volatility and stick to safer investment options like government bonds and fixed deposits in banks.

Sheep

It is a derogatory term for traders who follow herd mentality and purchase stocks based on tips of (usually false) advisors. The sheep make these manipulative advisors rich by buying stocks that they suggest. Massive buying raises stock prices and the advisor sells off shares at a high price. The sheep enter bull markets at the end of a bull rally and leave a bear market at the end of a bear rally.

Pigs

This is another derogatory term for ‘greedy’ investors. Their initial investing days in the stock market may have brought financial success and they wish to replicate this success repeatedly and quickly. In the quest for seeking fantastic returns, these investors sidestep potential and serious market risks. They often end up getting financially and mentally hurt.

Ostriches

They are the kind of investors that ignore poor market conditions. They bury their head in the sand (not literally!), just like an ostrich, when the market is not in their favour, with the hope that their portfolio will be unaffected once the market recovers. This strategy can be a double-edged sword.

Whales

They are the market movers. They are prominent institutional investors with significant capital at their disposal. When they buy shares, the market rises. Similarly, when they sell in bulk, the market falls

Stags

Stags are the calculative opportunists in the stock market. They see a winning strategy, execute it and leave the game only to return if another such strategy presents itself. They too can deploy a huge capital to trade and can reverse the market trend on the same trading day.

Wolves

Last but not the least are the wolves. They are cunning, manipulative, and resort to unethical ways to make money in the stock market. Wolves and scams go hand in hand. Remember the Wolf of Wall Street?

These are the animals that I’ve found in the stock market. Are you aware of any more animals that are associated with the stock market? If yes, let me know in the comments below.

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Hi there. I hope the spirit of Christmas is keeping you warm and cheerful🎄. I welcome all who have subscribed to Reflections recently and also acknowledge the older subscribers. Your support is what keeps me writing consistently. Your likes, comments and shares have helped my newsletter reach many readers across the globe. In fact, Substack tells me th…

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