Prepare a budget as if there will be a substantial or complete loss of income
Dealing with debt can be a stressful experience. Even in the best of times, repaying a debt is a commitment for the tenure you sign up for. You need to plan the cash flows and ensure that repayment does not get disrupted. Now, with the unexpected COVID-19 pandemic, the uncertainty of how long this lockdown and weak economic condition are going to persist, has changed our outlook towards debt. Almost all of us are impacted by the virus; the degree may vary but it has left a mark on our fiscal health.
All banks and NBFC's were permitted by the RBI to offer a moratorium on term and working capital loans. Home, car, personal, education and gold loans, as well as credit card bill payments were allowed to be deferred. Further, the RBI assured that availing this moratorium will not adversely affect the borrower’s credit score or affect the risk classification of the loan.
The moratorium is not to be misconstrued as a loan waiver or payment holiday. Interest rate on the skipped instalments will accrue and get added to the outstanding principle. Moreover, your payment tenure will increase by the number of months that you skip.
If you think you may fall behind on your EMIs, credit card dues, bills, etc., my advice would always be to go to your lender and explain your situation. When you state your situation upfront, the lender sees it in the right perspective and you also exhibit your integrity. It may allow you to adjust some repayments, rework your EMIs and, in some cases, you may be allowed to avoid interest charges. You can avoid being reported as a defaulter by communicating and pre-empting certain penal actions.
Dealing with debt prudently
-Spending in malls, making impulsive purchases, eating out and going to movies have all reduced. Our fuel bills have drastically gone down. Eating at home has reduced our food bills. All of the above has led to lower monthly household expenses. Put all discretionary spends on hold, keep the expenses at the minimum as if it is an emergency. Conserve your bank balance. This may be a good opportunity to reassess your wants and must-haves and rework your living expenses.
-There may be job losses or pay cuts, and delayed salaries as we move ahead. With production and economic activities grinding to a halt, several sectors are facing rough weather. All these factors can lead to partial/deferred pay, cancellation or deferment of performance bonus, variable pay etc. Job seekers/ freshers may face even worse situations. Prepare a budget as if there will be substantial or complete loss of income. Cut living costs, explore alternative personal income sources. Look for old investments that you had made and see which ones you can redeem to help you tide over.
-Avoid new debt like the plague, unless it is essential. In most cases, a large home loan or auto loan is always provided for and is manageable. The troublesome ones are the credit card bills and personal loans, and these are quite expensive. Bankers never let your EMIs go beyond 50 per cent of your net monthly income. However, if you use your borrowing limit judiciously, with low credit utilisation, it not only helps you manage debt repayment easily during difficult times but also use your unutilised credit limit to manage temporary cashflow challenges.
To start with, to avoid debt, you have to stop taking more loans. If you have expensive personal loans or credit card dues, my advice would be to redeem some old investments and pay these loans off. You may look to liquidate low-yielding MF investments, bank FDs or debt mutual funds to pay off these expensive loans. Rather than earn a measly 3 per cent on your investment and pay 18-24 per cent interest, you are better off redeeming and easing your cash flows.
-Evaluate your assets. Now that you have more time on hand, it may be a good time to make an inventory of your assets and assess their performance. Make a list of which assets meet specific future goals. Know which investments to liquidate first should a need arise. If you have been a lazy investor or not a proactive investor, now is the time to make amends. Spend some time on your portfolio and work towards building it.
-Ensure financial protection. Take stock of your insurance policies. Life cover of the earning members and adequate medical insurance for the entire family are mandatory. Don’t delay the payment of premiums on existing policies if you can afford to pay. The in-between month of you not paying and the policy remaining active, the one month cooling and waiting period for many diseases will leave you and your loved ones exposed during a critical phase. Therefore, all other life priorities must wait till you provide life and health insurance protection to your family. This will also save you from taking personal loans, swiping credit cards, when hit by an unexpected medical emergency.
-‘Spend less and save more’ is the new self-realisation mantra of millennials too. Many people used to believe that they do not have any scope for further savings. But the lockdown has proven otherwise. Most expenses, which were believed to be essential, are proving to be discretionary. The lockdown has compelled people to manage their lives with the bare minimum for almost three months and hence savings have obviously increased.
-Pre-pay and foreclose your loans. If you happen to be nearing the end of any loans, consider closing them off so that you aren’t burdened with EMIs for the coming months. This will help you have a clean slate and make things easier in the future if you find that your employer has asked you to take a pay cut.
A pandemic is a good time to do your homework and learn about your finances, instead of going to your relationship manager or investment advisor.
Always remember, you cannot outsource personal finance and fitness. These, you need to do yourself!(The writer is founder Director of rectifycredit.com)