To say that the COVID-19 pandemic took the world by surprise would be an understatement. It has destroyed economies and businesses. Companies across sectors are reinventing business models to stay relevant in the changing ecosystem, and individuals are forced to reorient their finances to survive in the new world. To put it simply, the coronavirus pandemic has triggered the onset of a new world, which has new rules for financial planning.
With heightened uncertainty amid a continuing pandemic situation, having financial foresight has become crucial. The data being reported from all quarters, especially on unemployment, is inducing more panic and underlining the need for updating financial planning practices to stay protected from any uncertainties.
The Indian Society of Labour Economics expects job losses to be the severest impact of the pandemic in the near term. Since the lockdown began, India's average unemployment rate has hovered around 24 per cent, a significant jump from 8.8 per cent in March, according to data from the Centre for Monitoring Indian Economy. While self-employment activities and other causal work has led to a sharp fall in unemployment in June, a recovery in formal sectors is still some time away.
These job losses have hit families and dent household income significantly. Latest available data suggests that household income has dramatically fallen from 9 per cent in late February to 45.7 per cent in mid-April. Things have only worsened for families with a single bread earner.
However, taking knee-jerk decisions based on the current economic situation may not be the best course of action. Considering the pandemic is still spreading, comparing any impact with pre-lockdown levels is not ideal, and should only be perceived as indicative of a cyclical change. The best course of action is to evaluate your long-term goals, current income levels, likelihood of income loss, and provisions for any emergent financial impact like health risks.
So, with such continued uncertainty looming on the horizon, here are some measures you can take, both in the short and medium term, to financially tide through this time:
a) Managing your liquidity:
The first course of action is to draft a monthly household budget. The idea is not to curb every petty expense but to follow a more conservative lifestyle by avoiding certain discretionary spends.
While it might seem ideal to keep all your money liquid, it may not necessarily be beneficial for your long-term aspirations. It is important to keep cash in hand only for your urgent needs, or you risk eating up your savings. This can hamper your medium to long-term liquidity, and you will end up with no reserves by the end of this pandemic.
b) Managing your investments:
After you have drawn up a budget, review your financial portfolio to find avenues for short-term liquidity. But avoid any abrupt decisions like liquidating all your assets. If you are hard-pressed for money, start by liquidating a bank FD or debt funds instead of equity-linked investments. Unless you are in survival mode, do not dip into savings earmarked for your retirement or child's future planning.
Simple measures like moving your investments from high-risk to low risk ones can also make a huge difference. Similarly, it might be a good time to re-look at your financial managers, be it the banks, or the mutual funds, and the sectors you are invested in - review the risk levels to ensure your investments aren't hurt in the near term.
c) Paying your EMIs:
A big worry, following a job loss or furlough, is likely to be paying EMIs for your home, car and other personal loans. In case you are unable to honour your commitments, talk to your bank about an EMI holiday for a few months. Some banks may apply a penalty for the EMI deferment, but your immediate concerns can be resolved through this route. Some banks may also accommodate individual requests to temporarily lower your EMI and extend the tenure of the loan. However, this may briefly impact your credit rating as it could be perceived as loan restructuring.
d) Use your credit cards responsibly:
You might be tempted to frequently use credit cards in this scenario. But it is inadvisable, because irresponsible use of credit cards can land you into further trouble by putting your finances into complete disarray. If there are dues pending on your card, do not roll them over as they will incur heavy interest. Prepare a plan to repay your credit card dues over the next 2-3 months instead.
e) Learn lessons from today's uncertainty:
Once your financial situation normalises, learn from the lessons of the challenges you have faced. You might want to create a contingency fund in case any such concerns crop up again in the future. Focus on increasing your savings; it is advisable to earmark at least 10% of your financial portfolio towards savings products.
Evaluate guaranteed savings and income plans for wealth accumulation towards long term goals. If you haven't yet started planning your retirement, it might be an opportune time to evaluate annuity or pension plans. Income concerns are likely to hit you again once you retire, and this is a good time to start planning for it.
This pandemic has shed light on another crucial element of financial planning - need for protection products like term and health insurance. While COVID-19 might be a unique event, there are several other critical illnesses that impact families much more, like heart ailments and cancer. Apart from making a massive dent in a family's savings, lack of protection leaves you and your family grappling with undue stress of the day-to-day living, while coping with stress or a tragedy. An insurance product will help your loved ones retain their lifestyle and long-term financial goals, without disruption.
(Anup Seth is Chief Retail Officer at Edelweiss Tokio Life Insurance)
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