“Dental costs are crazy,” said Singh, adding that they are often not covered in typical health insurance plans.

He then decided to start a separate Systematic Investment Plan (SIP), specifically to save for dental costs. He invests ₹6,000 a month in an index fund, hoping to build a corpus which will come in handy when the next such bill comes around. “I am going to forget about this money,” said Singh.

While Singh is focused mainly on dental costs, financial advisors say there is merit to setting aside money for such unexpected large expenses that can come your way. This is in addition to an individual or family’s emergency fund and regular savings and investing plans, which may focus on goals such as retirement or children’s education.

Life can throw surprises and large bills in various ways. There could be medical emergencies that are not covered by typical health insurance plans, such as dental, hearing and vision issues. A health problem for your pet, or that of a family member who is not covered under your insurance, could also cause a hit. Those who own a home may face significant bills for home renovations, such as replacing all wooden cupboards due to a termite infestation, redoing and painting a house when a tenant leaves, or covering expenses not covered by vehicle insurance.

Insurance shortfalls

Singh shared the experience of an acquaintance who owned an Ather electric scooter. A rat had bitten through some wires in the scooter, and when the acquaintance went to get it fixed, the Ather representative said the entire motor would have to be replaced. However, the motor vehicle insurance company stated that a rat bite was not covered under his vehicle insurance policy. “His first reaction was: I’m gone,” said Singh. “That guy was counting on the insurance.”

Singh, who maintains a separate retirement fund and an emergency fund and now a separate dental fund, advises young people to start a SIP early to build a reserve fund for such unforeseen expenses. “Insurance is never going to be enough,” he said.

This was a hard lesson for Sudhindra A., an information technology professional based in Bengaluru.

In 2016, Sudhindra’s wife was diagnosed with a rare illness which needed urgent surgery. The surgery’s cost was twice the amount covered by his company’s health insurance. “I had to shell out money from my pocket,” he said. Until then, Sudhindra said he had taken his corporate insurance for granted.

Now, with help from International Money Matters, a Bengaluru-based financial advisory firm, he has increased his family’s health insurance and is building a separate corpus to cover any future needs related to his wife’s illness. “If there is something unanticipated, this medical corpus can come to the rescue,” said Sudhindra. He continually adds to that corpus to keep pace with rising costs.

Around a third of this is in arbitrage mutual funds, so that it’s easily accessible, another one-third is in hybrid or balanced funds, and the rest is in equity mutual funds, so that there is a combination of liquidity as well as growth, according to Rohini Pamarthi, an investment adviser and assistant vice-president at IMM.

Allocation tactics

If funds are not available when needed, individuals may end up taking out expensive personal loans or, worse, putting expenses on their credit cards, which is among the most expensive forms of credit.

Good financial planning requires that everyone have an emergency fund, equivalent to three to six months of their monthly expenses. This money is to be invested in a readily accessible account, such as a fixed deposit. Its role is to provide an immediate safety net in case you lose your job or have another emergency. If you’ve used this fund, make sure that you refill it at the earliest, either by diverting any extra income received later or, if needed, even by selling some of the long-term investments, keeping tax considerations in mind, said Pamarthi.

In addition to the emergency fund, she said, they try to anticipate large expenses for their clients and reserve some funds for that purpose. Upgrading a car or home maintenance and renovation require large sums of money, so based on conversations with the family, they estimate how much and when the money will be needed. “We maintain a separate number for it,” she said.

One reserve for all

To be sure, many people typically just keep one savings pool, which can be used for emergencies as well as large, unexpected bills

Whether you need to have a separate reserve fund for sudden or large expenses depends on the individual’s psychology. If you’re disciplined, a general savings pool can work, but some people may benefit from segregating their savings.

“It’s just that emotional attachment that you have when it’s earmarked—then you don’t touch that money,” said Pamarthi.

Such a reserve is particularly important for entrepreneurs and start-up founders, and it can possibly be for larger amounts. “A lot more uncertainties are possible there,” said Pamarthi.

She said she has seen cases where people start a business, but it doesn’t work out, and the entrepreneur faces a huge liquidity crisis. “You have money, but you don’t have access; everything is stuck in the business,” said Pamarthi.

In the case of Delhi-based Punam Nanda, 72, when her business went bankrupt a few years ago, it left her financially devastated. She had to sell some land she owned in Gurugram, and using the proceeds from that, she invested in fixed deposits, which she uses as a retirement nest egg, from which she draws a monthly income.

Although now in retirement, Nanda has diligently built a reserve for unexpected expenses over the last six years by setting aside whatever is left after her monthly expenses. This way, she doesn’t have to touch her retirement nest egg.

She spends carefully and includes smaller repairs or car maintenance costs, which typically range from ₹10,000 to ₹15,000, within her monthly expenses. However, when a recent home renovation project for woodwork threw up a bill of more than ₹35,000, Nanda said she was unfazed, thanks to her reserve.

“Those funds are there, and they keep accumulating,” she said.

Nanda said she hadn’t thought about having such a fund in her younger days, but given her experience, she said it’s a good idea to start this early. “This can be relevant for anybody,” she said.