Facing a pay cut or job loss? Here’s how you must deal with money matters

Representative image (Source: Shutterstock)

Tiding over income disruptions caused due to COVID-19 induced lockdown can be a difficult task, especially in the absence of a well-prepared financial plan that factors in such exigencies.

Follow these suggestions if you face a pay cut or a job loss to sail through difficult times.

For those who lost their jobs

Redeem fixed income investments

To begin with, identify fixed-income investments in recurring deposits, debt funds or fixed deposits that are not earmarked for any crucial financial goals. The returns generated by such fixed-income investments are usually lower than the long-term returns generated by other asset classes, especially equities. Redeeming fixed deposits or recurring deposits before its maturity may attract prepayment penalty, it would also entail the risk of capital erosion.

Withdraw from EPF corpus

As a measure to provide relief to employees facing income disruptions, the government has allowed EPF subscribers to redeem up to three months of basic and dearness allowance or 75 percent of their EPF balance, whichever is lower. However, since withdrawing from EPF can adversely affect post-retirement security, consider this option only if your existing fixed-income investments fall short of mitigating income disruptions.

Convert outstanding credit card dues into EMIs  

Credit cardholders unable to repay their dues can convert their outstanding amount or big-ticket expenses into EMIs. The interest rate of such EMI conversions are much lower than hefty finance charges levied on unpaid credit card bills. The repayment tenure of EMI conversions can be up to five years. This allows card holders to repay dues in smaller tranches as per their capacity.

Avail relief measures announced under RBI’s resolution framework

The RBI has announced some relief measures aimed at providing relief to existing borrowers who are adversely impacted by the second COVID-19 wave. Individual borrowers who did not take loan restructuring schemes announced last year, have been allowed to avail a one-time restructuring of their loans till September 30 this year.

Keep in mind that this facility can only be availed for loan accounts classified as “standard” as on March 31, 2021, with outstanding dues of up to Rs 25 crore. Thus, existing borrowers who cannot repay their loans due to job loss can consider availing the loan restructuring facility.

Since availing loan restructuring scheme can increase the interest cost of the loan, take this option only after exhausting others.

For those who took pay cuts

Given their access to disposable income, the financial position of those experiencing pay cuts may not be as precarious as those unemployed as a result of COVID-19.  Here are some ways to consolidate your financial position and stay prepared for any future uncertainty.

Boost your emergency fund

The primary objective of maintaining an emergency fund is to meet unavoidable expenses during the period of loss of income arising out of unemployment, illness or disability. Ideally, this fund should be big enough to meet unavoidable expenses of at least six months and should not be mixed with the corpus created for meeting other financial goals. Hence, those who do not have adequate emergency funds in place should try to prioritise it for dealing with income disruptions or other financial exigencies in future.

Your emergency fund should be parked in high-yield saving accounts for ensuring instant withdrawal. Those comfortable using the internet or mobile banking can park their emergency funds in fixed deposits.

Consider secured loans

Lenders consider repayment capacity, job and employer’s profile of loan applicants while evaluating their loan applications. Widespread economic disruptions owing to the pandemic have made banks and NBFCs more stringent when it comes to approving loan applications. Hence, taking unsecured loans may be challenging for those working in industries that are most impacted by the lockdown such as hospitality, travel and entertainment.

If you find it difficult to avail unsecured loans in the current scenario, consider gold loans, loan against securities and loan against property to mitigate financial shortfalls. As secured loans are backed by adequate collateral, lenders tend to be relatively more relaxed while approving these loans.

Buy adequate health insurance cover

The COVID-19 pandemic has demonstrated the importance of having an adequate health insurance cover. A single instance of hospitalization can erode one’s lifelong savings and severely reduce the possibility of meeting future financial goals. Even those covered by an employer-provided group health cover should purchase a separate health insurance policy. Purchase adequate health insurance policy for family members and yourself in order to minimise the risk of hospitalisation and treatment expenses exhausting your corpus.