A ready reckoner for your finances and savings during these difficult times
The global economy is in a crisis. The Covid-19 pandemic has pushed entire nations into lockdowns, and crushed value chains. Unemployment has risen to unprecedented levels. Your personal finances will not be immune to the crisis. Therefore, smart money management is critical to survival through this period.
Care must be exercised with the four pillars of your personal finance: liquidity, insurance, loans and investments. The situation calls for calm-headed decisions that help you fortify your household finances and help you come out of the crisis unharmed. Here’s a series of suggestions to help you deal with various facets of your finances.
Build reserves: You must always have 3-6 times your current monthly income in your reserves. Grow it to 12 times over time. During emergencies such as job loss or health crisis, fall back on this fund. Do not use this fund for discretionary or lifestyle spends such as vacations, shopping, entertainment etc.
Maintain cash in bank & FDs: There’s no need to stash cash at home. Leave your money in your bank account or a bank fixed deposit and maintain the minimal cash you need at home. Transact digitally as much as you can.
Split your banks: Rely on stable banks with low NPAs and a good track record. During a crisis, you want unrestricted access to your cash. Split your deposits in accounts at multiple banks as a risk mitigation tactic.
Be frugal: Conserve cash. Reduce discretionary expenses. Focus on essential spending. It may be a while before the global economy rebounds.
Liquidate assets thoughtfully: If you need to raise cash, liquidate investments and sell assets in a thoughtful manner on a need-to basis. Liquidate the most disposable assets first. Save the best-performing assets for last.
What to do about insurance?
Don’t miss premiums: Continued coverage is critical to your family’s finances. Don’t skip premiums or discontinue your policies. Not having insurance now could devastate your finances. Health insurance could cover your hospitalisation costs while life insurance will provide for your family in your untimely death.
Employer-provided insurance isn’t enough: Your employer-provided group health insurance coverage will last as long as your job. Its coverage may also be inadequate. Therefore, always own an independent, adequate-sized coverage purchased from the retail market.
Take your employer-provided insurance with you: While leaving your job, convert your company-provided group health insurance to an individual, retail policy. Check with your employer and insurance provider about it, pay the premium according to the market rate and enjoy continued coverage without waiting periods.
Have existing insurance? Top it up: Improve your basic coverage by buying a super top-up health insurance. It’s a cheap way to get additional, large-sized coverage with your basic coverage acting as a deductible.
Have dependants? Get a term plan: Your financial dependants — parents, spouse, children — need protection against your untimely death. Ensure you have a term plan with a sum assured worth 10-20 times your current annual income. This will cover your family’s income needs after your death.
What to do with investments
Avoid panic: Panicky decisions will compound your losses. Let information and clear-headed thinking guide your decisions. The markets have crashed; you may have lost money. But the markets will rebound. Play a long-term game. Consult your investment advisor before any drastic measures.
Evaluate your investments: Aim to build an all-weather investment portfolio. This is a good time to clean up your portfolio, get rid of bad investments, and add ones suited to your life goals, risk appetite, and liquidity needs.
Invest in a plan: Investments must be earmarked to specific goals. Goal-less investing creates trouble.
Liquidate investments only if you need money: If you’re in need of cash, liquidate investments in a thoughtful order determined by which investment is most liquid and most disposable. For example, you could encash your emergency fund first before you move to long-term investments such as provident fund and mutual funds.
Continue SIPs & monthly payments: If you have regular income, don’t stop investing. If you don’t, pause investments for now. Don’t liquidate the investment unless you need cash. Once you have income stability, resume investing.
Invest in a mix of assets: Your assets — deposits, equity, bonds, gold, real estate — need to be selected in a proportion appropriate to your life goals, returns expectations, risk appetite, income, and liquidity needs. Don’t put all your eggs in one basket.
How to manage loans
Need a fresh loan? Have a repayment plan: Always have a full repayment plan. Don’t take on more than you can chew. All your EMIs should ideally be no more than 40 per cent of your monthly pay.
Careful with credit card dues: Credit card interest may be in the 36-42 per cent per annum range. Don’t let your dues build up. Keep repaying them in full on time on priority to continue enjoying interest-free periods. Minimum payments will keep you in debt longer.
Compare before borrowing: Scan online marketplaces for the cheapest loans and pre-approved loans. Some loans are cheaper than others. For example, a top-up home loan or gold loan may be cheaper than a personal loan, which in turn is cheaper than credit card debt.
Use the moratorium if you must: Lenders are providing a three-month moratorium on loan payments ending May 31, 2020. Use the option if you have liquidity problems. But be aware of the interest that will accrue during the deferment. If you have regular income, continue to pay your EMIs because you have nothing to gain from the deferment.
Bounce back from moratorium: If you use the moratorium and defer payments for 2-3 months, you may end up adding many more EMIs to your loan. To bounce back from the additional interest, pre-pay the number of EMIs you had deferred.
You have a responsibility to remain financially stable through the ongoing crisis. Therefore, take the steps necessary for your financial fortification.
The writer is CEO, BankBazaar.com