On March 25, we completed one year of the COVID-19 induced lockdown in India. The health and financial crises triggered by COVID-19 took a toll on many, several people lost the jobs and some faced pay cuts from the employer.
Mumbai-based Govind Shah (name changed), who lives with his wife and daughter, lost his job as a marketing executive with an event management company in December 2020. The pandemic and the subsequent lockdown meant a loss of business for his firm, which had first cut salaries in April. Shah had taken a 50 percent pay cut back then. He is still searching for a new job, while he and his family make ends meet from his investments, that he had to liquidate.
Pune resident Harsh Kelkar, an Information Technology professional, was slightly luckier. He did not lose his job. But a salary re-structuring reduced his take-home pay so much that after paying his equated monthly instalment (EMI), he saves just Rs 10,000 a month now. He has been forced to seek help from his parents who earn pension.
An emergency fund is indispensable
Like many others hit by COVID-19, Shah and Kelkar are worried about meeting monthly expenses. Here’s where an emergency fund helps, to take care of job or income loss. “Keep aside six months’ worth of household expenses if you are salaried. But if you are a freelancer with uneven income flow, earmark 12 months’ expenses to this fund,” says Pankaj Mathpal, Founder, Optima Money Managers.
Also read: How big should your emergency corpus be?
If you exhaust your existing emergency fund, rebuild it, “Even with limited savings. Cut down on discretionary expenses. Use liquid, ultra-short-term funds or even bank fixed deposits to park your cash,” says Harshil Morjaria, Mumbai-based certified financial planner of ValueCurve Financial Solutions
A large insurance cover is a must
Mumbai-based animation professional Vinay Chupal enhanced his health insurance cover, just this time last March, from Rs 5 lakh to Rs 10 lakh. It was a family floater cover. In December, he contracted COVID-19 and was hospitalised. The bill was for a far lower amount, it ensured peace of mind as at least he was adequately covered.
“There were many cases where COVID-19 led to family members being hospitalised. A combination of a base cover and top-up works, so that your total premium outgo is lower,” says Puneet Oberoi, Director, Excellent Investment Advisorz. A cover of at least Rs 10 lakh is vital, even if you have the employer’s insurance.
Take adequate life insurance cover, too. This should take care of your family’s expenses if you die, and can pay off your liabilities and help reach crucial goals (such as your children’s education) on track. “COVID-19 had triggered fears. I had just taken a home loan and wanted to ensure that my family is financially secure,” says Chupal, who bought additional life cover last April.
As a thumb rule, your life insurance cover must be at least 10 times your annual income.
Paying expensive home loan EMIs? Switch out
Banks have reduced home loan interest rates. State Bank of India reduced its interest rates on March 1 from 6.8 percent to 6.7 percent on home loans of up to Rs 75 lakh. It also decided to waive its processing fees. These specially-reduced rates are limited period offers available until March 31. Kotak Mahindra Bank, too, reduced its interest rate by 10 basis points.
Besides making part prepayments, you should also look to shift your loan to a different lender if your existing bank or housing finance company has not passed on the full rate cut benefits to you. This is especially true if your home loan is linked to older Base Rate or Marginal Cost of funds-based Lending Rate (MCLR). However, you should first negotiate with your existing lender.
Yogesh Mestry, 33, negotiated with his bank in January earlier this year and his interest rate was reduced to 7.25 percent from 8.5 percent. “With these savings, I am planning to invest Rs 5,000 every month in a bank recurring deposit. From March 2022, I plan to prepay a lump-sum so that loan burden comes down,” he says.
However, a better option – if you can afford it – is to maintain the same EMI and reduce the tenure instead. This will help you pay off your loan quicker.
At the same time, try to cut back on loans. “Avoid big-ticket purchases such as a smart television set. Don’t take on new EMIs in these times,” says Suresh Sadagopan, Founder, Ladder7 Financial Advisories. Raj Khosla, Founder, Mymoneymantra says that total EMI outgo should not exceed 50 per cent of our monthly income.
Don’t forget to invest, regularly
After reducing his discretionary spends, Mumbai-based Abhishek Jaju, who had earlier opted for the home loan moratorium started investing Rs 10,000 every month in a bank recurring deposit for a one-year period. “I am building a corpus to start pre-paying my home loan,” he says.
Morjaria says it’s crucial that in all this money and health crises, investments must continue.
Do not withdraw from your employees’ provident fund to repay loans. “It’s tempting to do so, especially if retirement is far away. But withdrawing from the retirement
kitty is dangerous. You will start to panic after crossing 45-50 years of age and realise that not much savings are left in the retirement kitty,” says Sadagopan.