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Coronavirus impact: Are you financially prepared for a job loss?

For a single income family, financial planners’ advice is to build an emergency corpus equivalent to twelve months’ expenses

March 24, 2020 / 07:23 PM IST

We’re living in tough times. The coronavirus (COVID-19) pandemic has curtailed business operations across sectors globally. With restrictions and lockdowns imposed on over 80 districts in the country till the end of the month at least, businesses are bound to be hit badly. The bad news is that no one knows how long the pandemic would last. As we begin to spend more days working out of our homes and some governments around the world even locking down cities, the question is how long would our employers continue to pay us salaries? Will our companies even survive? On March 18, the United Nations estimated that globally over 24 crore people could lose their jobs due to the coronavirus pandemic.

Those working in the travel and tourism industry, including in hotels and airlines, are in danger of losing their jobs. With cinemas and malls being shut down, the job scene is perilous. Indigo Airlines announced a salary cut of 5-25 per cent for employees.

So, are you really financially prepared for a job loss or a pay cut?

Set aside larger emergency kitty

Everyone’s financial portfolio must have an emergency corpus to tide over a temporary financial crisis. Your emergency corpus should include the equated monthly instalments (EMIs) you pay, monthly systematic investment plans for your future goals, education fees for your children and other such monthly commitments that you simply can’t get out of.

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COVID-19 Vaccine

Frequently Asked Questions

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How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

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For a single income family, financial planners’ advice is to build an emergency corpus equivalent to twelve months’ expenses, including EMIs. In the case of a double income family, that savings should at least be for around six months’ worth of expenses.

Vishal Dhawan, certified financial planner and the founder of Plan Ahead Wealth Advisors says, “Someone who doesn’t have an emergency corpus built for such uncertainty should start saving aggressively for the next couple of months so they can deal with uncertainty and regular expenses during a job loss.” Cut down on your expenses or SIPs temporarily to build an emergency corpus.

Use liquid funds, ultra-short term funds or even bank fixed deposits to park your emergency corpus. However, do not stop investing for future goals; you may trim your SIPs temporarily if you don’t have an emergency corpus yet.

Assess insurance needs

Make sure that you are well insured. Hospital bills can burn a big hole in your pocket, especially in times of slowdown or job loss. Have a critical illness policy too if you don’t yet. Ideally, for a family for four living in a metro city, you should have a basic family floater health cover of at least Rs 5 lakh to start with. You can review and enhance this cover every five years depending on your requirements and healthcare inflation. You can add a super top-up, which is triggered after the base sum insured is exhausted, of another Rs 10 lakh. For an individual, the minimum desirable cover is Rs 5 lakh.

It’s important to have insurance, despite your office providing you a cover. Dhawan says, “In case of a job loss, your employer’s cover gets terminated immediately.”

Look at your monthly budget, again

One of the best ways to prepare for an economic slowdown is to cut down on your monthly expenses. Assess where you can spend less. As it is, due to the pandemic, your entertainment bill must be curtailed, as restaurants and cinemas are out of bounds. Use this opportunity to divest some of your savings towards your emergency corpus.

Suresh Sadagopan, Founder of Ladder7 Financial Advisories says, “Avoid big-ticket discretionary purchases such as car, two-wheeler or smart television set. Don’t take a burden of new EMIs in this situation.” These steps would enable you to slash monthly budgets by 25-30 per cent from the present expenses. Make a budget. If it’s not an urgent spend, then postpone it for better times.

Managing debt obligations

In case you are repaying EMIs, don’t stop them due to a job loss. Try to meet your loan commitments from existing investments or selling physical assets (gold, second home or property).

Talk to your lender about your job situation before stopping the monthly instalments, as it could impact your credit score and history. Request your lenders to increase the tenure of the loan, which in turn will reduce your EMI obligations. Sapna Tiwari, Co-founder and COO, Rupeewiz Investment Advisors says, “Appeal to your lending bank for a moratorium on your instalments during the pandemic, without any levies of any penalties or late charges.”

Any unsecured debt (credit card dues, personal loans, etc.) should be repaid first because the interest costs are very high. Interest on credit card due is the highest (up to 45 per cent a year) and that on a personal loan varies from 14-25 per cent based on risk profile of the borrowers. Defaults in loan repayment could put you in a debt trap.

Do not withdraw from your retirement corpus

Do not touch your provident fund or any other investments earmarked for your retirement. Most of you will have the temptation to withdraw money from these investments to pay for loan EMIs and regular expenses when your job is lost because you might feel retirement is far away. But that would be a huge mistake.

Sadagopan says, “Withdrawing from the retirement kitty is a dangerous. But, they start to panic after crossing 45-50 years of age when they realise that not much savings is left in the retirement kitty.” As important as it is to tide over the present financial crisis, if you fall into one, it’s equally important to be financial prudent in your retirement years when your income drops substantially or even stops.
Hiral Thanawala
first published: Mar 24, 2020 09:10 am

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