The COVID-19 situation calls for calm-headed decisions that help you fortify your household finances and come out of the crisis unharmed. We’re putting together a series of suggestions to help you deal with various facets of your finances.
The global economy is in a crisis. The Covid-19 pandemic has pushed entire nations into lockdowns, crushed value chains, and stressed household finances. “This is a crisis like no other,” said IMF’s Kristalina Georgieva. “We have witnessed the world economy coming to a standstill. We are now in recession. It is way worse than the global financial crisis of 2008-2009.”
Unemployment has risen to unprecedented levels globally. 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. We’re putting together a series of suggestions to help you deal with various facets of the four pillars.
1. HOW TO MANAGE CASH
The dos and don’ts of liquidity management.
1.1 BUILD EMERGENCY RESERVES
You must always have 3-6x your current monthly income in an emergency fund that can be accessed at short notice without any penalty. During emergencies such as job loss or a health crisis, fall back on this fund. Do not use this fund for discretionary or lifestyle spends such as vacations, shopping, or entertainment.
1.2 MAINTAIN CASH IN BANK & FDS
There’s no need to stash cash at home. The Indian banking system is robust and safe. Put your money in a high yielding savings bank account or a fixed deposit at a bank and maintain the minimal cash you need at home. Transact digitally as much as you can. Use UPI-based apps and online transfers.
1.3 SPLIT SAVINGS ACROSS TWO BANKS
Rely on banks with low NPAs and a good track record. They’re currently your best bet. During a crisis, you want unrestricted access to your cash. Between you and your family members such as your spouse, split your liquidity among two banks in case one bank goes temporarily into moratorium.
1.4 BE FRUGAL
Conserve cash. Reduce discretionary expenses. Focus on essential spending necessary for your survival, nourishment, safety, and good health. It may be a while before the global economy rebounds. Therefore, spend carefully.
1.5 LIQUIDATE ASSETS THOUGHTFULLY
Liquidate your assets and investments in an orderly manner. Do so on the achievement of a goal, to cover urgent short-term cash needs, or to protect the investment from irrecoverable losses. Also know the tax implications of the liquidation as well as the costs of liquidation such as penalties or exit loads.
2. WHAT TO DO ABOUT INSURANCE
Owning health and life insurance is critical during a pandemic.
2.1 DO NOT 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 family’s finances. Health insurance could cover your hospitalisation costs while life insurance will provide for your family in your untimely death.
2.2 EMPLOYER-PROVIDED INSURANCE ISN’T ENOUGH
Your employer-provided group health insurance coverage will last as long as you have the job. Also, it’s a one-size-fits-all policy whose coverage may be small. Therefore, always own an independent policy from the retail market for yourself and your dependent family members. Make sure this policy adequately covers most of your health risks.
2.3 TAKE YOUR EMPLOYER-PROVIDED INSURANCE WITH YOU
While leaving your job, you can convert your company-provided group health insurance to an individual, retail policy. Check with your employer and insurance provider about it, pay the premium as per the market rate, and enjoy continued coverage without the waiting periods.
2.4 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.
2.5 HAVE DEPENDENTS? GET A TERM PLAN
Your financial dependents – 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.
3. WHAT TO DO WITH YOUR INVESTMENTS
There are two broad concerns: managing existing investments and making fresh investments.
3.1 AVOID PANIC
Panic-driven decisions may compound your ongoing losses. Let information and clear-headed thinking guide your decisions, be it a liquidation or fresh investments. Have a valid reason to liquidate your investment. Buy new investments if they’re in line with your financial goals. With long-term investments, it may be advisable to tolerate the ongoing volatility in order to earn higher returns later. For example, index fund investors can get high returns with a horizon of five years or more.
3.2 INVEST TO A PLAN
Each investment you own must be earmarked to a specific goal. Align all existing or new investments to clear goals defined with the money they need, time left, monthly contributions needed, and returns expectation. For example, to save Rs. 3.5 crore in 30 years, you can invest Rs. 10,000 in a monthly equity mutual fund SIP with a returns expectation of 12% per annum. Goal-setting helps find the appropriate investment instrument, manage liquidity, set expectations for optimal returns. Investments are also done for tax-saving under Section 80; however, this objective needs to be secondary.
3.3 FIND THE RIGHT MIX OF INVESTMENTS
Your assets – deposits, equity, mutual funds, bonds, gold, real estate etc. – need to be selected in the proportion appropriate to your life goals, returns expectations, risk appetite, income, and liquidity needs. For example, bank deposits are more suited to saving for emergencies than equity mutual funds.
3.4 EVALUATE YOUR CURRENT INVESTMENTS
The pandemic has provided many valuable lessons on financial priorities and planning. Therefore, take stock of your portfolio today. Investments that no longer align to your goals can be pruned. For example, some debt mutual funds are volatile and therefore it’s better to get assured returns with capital safety from a deposit at a large bank. Similarly, endowment plans may provide low returns, and PPF is illiquid due to withdrawal restrictions.
3.5 CONTINUE MONTHLY INVESTMENTS & SIPS
While investing to a clear plan, continue making your monthly contributions towards SIPs, PPF, or any of your chosen scheme, if you have regular income. If your income is stressed, pause your contributions. Don’t liquidate the investment unless you need the cash. Once you have income stability, resume investing.
3.6 GO DIGITAL WITH GOLD
Gold finds preference during any economic crisis as it moves counter-cyclically. However, as an investor, you can also invest in dematerialised gold to avoid making charges, GST and concerns over making charges. Your options are Sovereign Gold Bonds, gold ETFs, gold mutual funds, and digital gold.
4. HOW TO MANAGE LOANS
Don’t let your debts spiral out of control.
4.1 NEED A FRESH LOAN? HAVE A REPAYMENT PLAN
Always have a full repayment plan. Don’t take on more than you can chew. Make sure all your EMIs are no more than 30-40% of your monthly disposable income.
4.2 DON’T BORROW WITHOUT COMPARISON
Scan online marketplaces for the lowest interest rates and pre-approved loans. Some loans are cheaper than others. For example, a top-up home loan or gold loan may carry lower interest than a personal loan, which in turn costs less than credit card debt.
4.3 CAREFUL WITH CREDIT CARD DUES
Credit card interest may be in the 36-42% 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.
4.4 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.
4.5 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.
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There could be minor differences between the CIBIL scores that you see on different sites. This is expected.