In such times, every bit of your hard-earned money needs to be working hard for you
As the COVID-19 crisis takes further hold over the economy, its impact is beginning to be felt on its foot soldiers as well. Over the last few weeks, news reports have poured in on planned salary cuts and job losses from companies across sectors.
Cases such as those of CapGemini and Asian Paints rewarding their employees with pay hikes are rare exceptions. Over the next few months, most companies, depending on the severity of the impact, will take recourse to salary cuts, work without pay, and finally retrenchment, as they try to hold their head above water and conserve cash.
In the last few days, we ourselves have seen several cases of 25 per cent salary cuts, work without pay for the next six months, and job losses.
For most people, this is an unprecedented situation, and is likely to be a first-time experience. And in case you are not hit by it as yet, count yourself as lucky and prepare for an eventuality like this. The below 10 steps should hopefully help you plan for it and reduce much of the impact.
Expenses: Categorize and right-size
-April and May have been months where expenses would have come down dramatically
-Use this data to categorize costs into fixed (liabilities, school fees, insurance premia, rent, house maintenance, house-help salaries etc.), essential (food, utilities, must-have entertainment, fuel, etc.) and discretionary (shopping, entertainment, etc.)
-Cut discretionary ruthlessly, put off any capital expense, unless it just cannot wait
Ready your contingency fund – both Quantum and Safety
-Hopefully you would have parked aside some funds as an emergency corpus. A typical thumb rule to follow is six months’ expenses (fixed + essential) for a double-income family and nine months’ expenses for a single income family
-Ideally these funds should be in totally safe and liquid instruments such as bank (stick to the top 3-4 large ones) sweep-in FDs and liquid mutual funds
-Have a separate medical contingency fund
-This crisis is a special situation and hence this is a must, especially if you have aged or ill people at home
-You may assume that you have medical insurance to take care of it, but that will not be enough. A sum of Rs 5 lakh as a separate medical contingency should be adequate.
Liabilities – evaluate and eliminate
-While liabilities are not good to have even normally, during such times, they can be a terrible drag on your cashflows.
-List your liabilities, starting with the highest interest rate. A good way to categorize liabilities are criminal (credit card debt, personal loans), bad (vehicle loans, consumer durable loans) and not-so-bad (home loans, zero-EMI loans).
-Find ways to eliminate all liabilities, especially high-rate ones
-Moratoriums: These only defer the debt, not eliminate it, so you end up paying more interest over time. Hence, use it only in desperate situations and preferably only for low-rate low-tenure secured debt
Insurance policies – make sure they are adequate and up-to-date
-There are two kinds of insurances which are always important to have, and especially so in these times – Life Insurance (pure-cover term insurance) & Health Insurance.
-Life Insurance – Having policies is different from having adequate life insurance. Make sure you have enough insurance to cover your liabilities as well as key family financial goals. Term insurance will not be available for people who are not currently employed; in case you don’t have adequate insurance, now will be a good time to take it
-Health Insurance – while many will have corporate cover, that will not be available if not employed. Hence, having adequate personal medical insurance is a must. A Rs 20 lakh cover should be the minimum and a family floater is a relatively inexpensive yet effective option
-Vehicle Insurances – not a good time to default on these; please make sure these are up to date
Remember, there is no sense of shame in losing your job
-It happens, everywhere. In a fast-changing world, this is something that is going to be commonplace going forward, and already so in developed countries.
-If you have parents and kids (over 8) at home, sit them down, and explain the matter. Say that you have made adequate plans to handle such situations, and assuage their worries by taking them through as much as you feel is necessary
Skillsets – Upgrade & Adapt
-Use the time available to understand the likely changes in your business and how you need to adapt.
-Identify what fresh skillsets you are likely to need and invest time in upskilling yourself
Network – Start working it
-Update your profiles to reflect your best face
-Reach out to people you know. If ever there was a time to cash in on your personal equity, this is it
-Look for options. Don’t restrict yourself to just your domain; also look at adjacent ones.
Easier said than done, but this too shall pass
-The future is usually brighter than one thinks, and in times of distress, one always overestimates the difficulties ahead. Keep your faith in yourself and your spirits positive.
-Find ways to keep yourself busy, productive, take time to indulge in hobbies that you wanted to cultivate but never gave the time for
Use this time to review your finances
-In our experience, this is usually the most important thing that people put off for later. Guess what? While tomorrow never comes, unpleasant surprises do.
-In good times, inefficiencies in your portfolio can still be covered up by working harder. But in such times, every bit of your hard-earned money needs to be working hard for you! So, the important is now suddenly urgent!
-Clean up your portfolio to get rid of junk and other inefficiencies. There is no better time than now to re-evaluate your goals, re-prioritize them and re-align your investments.
-For all you know, you may be better off than you imagine financially, and even if not, the clarity of making sure that your money is best-placed with zero drag will give you tremendous peace of mind.
You can overcome the situation with the right mindset and a decisive approach. To echo Winston Churchill’s famous quote – “Never let a good crisis go waste.”(The writer is a financial planner and NISM-certified investment advisor, and co-founder of Finwise Personal Finance Solutions)