The first step is to ensure that you have an emergency corpus that takes care of your most essential expenses for six months
Pune-based Varun Rao, 36, is a worried man these days. He lost his job at a tour operator in April due to the coronavirus (COVID-19) pandemic.
Flight and holiday cancellations in the wake of the global lockdown have hurt the industry hard. Although Varun had been working for 12 years, he had neglected his finances all along; a mistake that now haunts him. A chunk of his funds is stuck in a house he bought in December 2019, by making a down payment of Rs 15 lakh. He is now paying equated monthly instalments (EMI) on a Rs 20 lakh home loan. His wife is expecting their first child shortly.
Varun is not alone. According to the Centre for Monitoring Indian Economy (CMIE) data, as on May 5, 1.8 crore salaried employees lost their jobs in the month of April.
Losing jobs or taking cuts in salaries is becoming quite common in these tough economic times.
But, you can still sail through the tough times if you plan your money matters well.
Build an emergency corpus
You could be out of a job for 3-6 months or even a year. The first step is to ensure that you have an emergency corpus on hand that takes care of your most essential expenses.
Check if you bank balance can sustain you and your family for six months. Key cost heads include your monthly grocery bill, EMIs you have to pay, your children’s education fees and so on.
Review your portfolio carefully. Too many traditional insurance policies that you don’t need, consistently underperforming mutual funds or a portfolio with too many liquid fund investments with negligible balances in each but when combined make a tidy portion can be a contingency corpus. Even physical gold that you don’t really need can be sold. Kalpesh Ashar, CFP, Full Circle Financial Planners and Advisors says, “Your financial advisor can help you identify such investments that you can sell”.
In the first week of May, Rao received half of his April salary and the company has committed to pay him his full and final settlement in June. This will include his gratuity, remaining salary for the month of April, leave encashment and reimbursement claims outstanding. Notes Ashar, “Rao should use the final settlement amount from the organisation to build an emergency corpus. This will help him tide over any temporary financial crisis or medical emergency in his family.” Use liquid funds, ultra-short term schemes or even bank fixed deposits to park your emergency corpus. Pause your SIPs in case you face a cash crunch.
Managing debt obligations
In case you are repaying EMIs, don’t stop them due to a job loss. Rao is selling off his investments in gold to pay his home loan EMIs. He did not opt for the loan moratorium since he understood that he will need to pay additional interest later.
Pay off your credit card dues immediately, if you have any. Interest rates on credit cards (up to 45 percent per annum) and personal loans (up to about 16 per cent) are massive and should be repaid first. Mrin Agarwal, financial educator and founder of Finsafe India says, “If you took a loan for purchasing a high-end mobile handset or consumer electronic device, then sell it off and settle the outstanding balance.” Defaults in multiple loan repayments could push you into a debt trap.
Get your insurance right
Sunil Kapoor, 29, lost his IT job with a day’s notice, in mid-April. That wasn’t all. He also lost his medical cover that his office provided, something his diabetic parents depended on since neither in the family had their own personal health insurance. Sunil is his family’s sole breadwinner. He lives with his wife and their two-year-old child.
Agarwal says that Sunil must buy a family floater health insurance cover of at least Rs 5 lakh on an immediate basis to protect his family. “As medical emergencies and hospital expenses can burn a big hole in your pocket, especially in times of job loss, your own personal health-cover helps.” As a relief during to COVID-19, you can also now pay your insurance premium in instalments, i.e., monthly, quarterly or half-yearly, instead of paying annually. In case of a job loss, this reduces the burden of paying a lump-sum. If your budget permits, a critical illness policy too must be bought in addition to a family floater plan.
Revisit your financial goals
Cut down your expenses. Our restaurant and shopping bills have dwindled anyway, due to the lockdown. How many movie streaming apps have you subscribed to? Restrict yourself to one. Online gaming has gone up in lockdown times. Avoid it; you could get addicted and lose money unnecessarily. Postpone any big-ticket purchases that you might have budgeted for earlier, irrespective of whether you have your job. Pre-shopping offers are being made by retailers. These give you shopping vouchers but come with a tight expiry date, to entice you to spend. Avoid them. Do not take any fresh loans. Ashar says, “Living in the present is more important than dreaming of the future.”
Do not withdraw from your retirement corpus
On March 26, the finance minister allowed withdrawals from our Employees’ Provident Fund Organisation (EPFO). You can withdraw up to 75 per cent of your EPF account balance or three months’ basic wages or the amount that you actually need, whichever is lower. Sunil took this opportunity and made his withdrawal because of his tight financial situation after his job loss. While it might have been a compulsion for him, experts advise against using the retirement corpus for any other purpose.Viresh Patel, CFP, founder of Financial North, says, “Do not touch your provident fund or any other investments earmarked for your retirement, because it can hurt your retirement kitty in the long term.” Withdrawing from your EPF corpus should be your last option.