What Is Walkout Money And How Much Do You Need?

Pre-pandemic, this article would have started with a hypothetical situation about not getting along with your manager or wanting to do something on your own. The pandemic has changed that. Now, I don’t need to explain the importance of having some money squirrelled away for an emergency.

Writing this as a blog post, makes me realise how totally obvious the need for an emergency fund is. Yet, I know people who have not planned and executed this simple basic step.

So, here goes, let me start from the first principles.

Why?

Every now and then in life, you might come to a crossroad. You will have a choice to say, ‘good-bye’ and step out of a commitment, be it to a job or a partner. At this point, you don’t want to be held back because you don’t have the financial means to walk out.

How much?

We can all calculate, speculate what the right amount could be, I have a simple suggestion.

One of the blessings to have come out of the Covid crisis is that we all know exactly how much money we need to survive on the bare essentials. Use your expenses from April, May, June 2020 as a baseline to understand what is the absolute minimum that you need for survival. Make sure you have enough to get by for at least 8-9 months in survival mode.

That will be your survival money or walk out money if you prefer that term. (yes I am aware of more colorful terms for this, but hey I choose to call it ‘walk-out money’)

Where do you keep this money ?

It would be a shame if your walkout money was invested in an asset which dropped value at the exact moment you needed it. Similarly it cannot be held in an asset that cannot be converted to liquid cash when you need it.

Therefore, I have my walk out cash held in a short term debt fund. Luckily the fund I use, has been doing reasonably well over the last couple of years, ’18 & ’19. Of course, in March 2020 even debt funds dropped. However, in the overall scheme of things, debt funds seem like a more logical place to hold the walkout money.

I recommend that you evaluate a similar instrument: liquid enough yet not risk-oriented. Of course, you need to be aware of your own risk appetite. Fixed Deposits these days are giving you 4% or less, in real terms that is negative (interest minus inflation). However, I would not advise against it if that is what makes you comfortable.

There are also some banks offering 6%+ in savings account – that is totally liquid and earning at par with or better than inflation.

Well, keep it under your bed, if you think that is the safest place. 🙂

The instrument where you hold the money is not as important as the fact that you need to plan and make sure you have the money set aside. Take your pick and put the money there !!

Summary:

Calculate the sum of money you need for basic expenses for 8-9 months and set that money aside. It is never to be touched unless you actually ‘walk-out’ !!

Avg (April, May, June ’20 Expenses) x 9 = Walk-out Money

You can also read here about the ten fundamentals , the very basics and how it started.