Starting your career amidst COVID-19? Here's how you must plan your money matters

Like the global financial crisis of 2007-2008, the economic challenges caused by the coronavirus pandemic has impacted financial planning in an unprecedented manner. Millennials have witnessed their parents losing their secure jobs or taking pay cuts, which have shaken up household budgets and financial goals. They have consequently woken up to the fact that traditional methods of financial planning may not provide an adequate buffer against a nationwide or a global economic depression.

Therefore, new earners should keep the following aspects in mind while making their financial plan.

Avoid the debt trap

Sahil began working in July 2019, with the sales team of a travel agency. In January 2020, he purchased a new mobile phone and a laptop on EMI (equated monthly installments) using his newly acquired credit card. He had to repay the dues over a period of 18 months.

Unfortunately, the COVID-19 pandemic adversely impacted global travel and he was laid off in May 2020. He was saddled with significant credit card balances. So, he had to borrow funds from his parents to pay those dues.

These days, loans to purchase vehicles and electronics are available at the click of a button, which tempts individuals into purchasing goods and services, without the immediate liability of having to pay for them. New earners need to follow a ‘delayed gratification’ approach by resisting the urge to splurge instinctively and instead defer such purchases to avoid indebtedness.

Also read: Graduating amidst the COVID-19 pandemic? Money tips to wade through a tough job market

Create an emergency fund

Millennials should insulate themselves from the prospects of job losses due to another global economic depression by creating an emergency fund that they could dip into if the need arises. Such a fund would help them tide over turbulent times and meet basic expenses such as rent and utility payments.

While the amount to be set aside as part of the emergency fund varies from individual to individual, a thumb rule is to have an emergency fund that is enough to meet expenses for at least six months, parked in a fixed deposit or a liquid fund.

Get adequate health and life insurance

A key aspect of sound financial planning is not only creating wealth, but also protecting the corpus so created. The pandemic has highlighted the fact that unexpected medical emergencies may cause a huge drain on financial resources if adequate health insurance is not taken. Further, new earners should also be conscious of the fact that the health insurance provided by their employer provides them benefits only till the time that they are gainfully employed. Therefore, new earners need to take a separate health insurance policy in addition to those provided by their employer.

Additionally, they should also obtain a term policy which provides funds to dependent parents or spouse and children in case of their demise, which should cover their expenses for at least 20 years, adjusted for inflation.

Leverage the power of compounding and imbibe goal-based investing

Compounding is rightly referred to as the eighth wonder of the world; investments that compound over a long period, grow exponentially.

New earners need to realize that not investing early in life will be one of the biggest mistakes that one can commit. For example, a SIP of Rs 20,000 a month, started at the age of 30, would grow to Rs. 4.6 crs on retirement at 60, whereas, a delay of five years would increase the monthly SIP to Rs 35,000 for accumulating a similar retirement corpus at 60. The growth rate for both the scenario is assumed at 10 percent a year.

Leveraging the power of compounding is best accompanied by goal-based investing, wherein the investments are aligned with future expenses, adjusted for inflation. To begin goal-based investing, you should classify your goals as short, medium, and long terms, based on the time horizon over which they expect to incur those expenses and decide on a combination of debt and equity investments accordingly.

Also read: The well-trodden path to becoming a crorepati

Create an estate plan

The final step of an efficient financial plan is to create an estate plan for the smooth transmission of assets to one’s legal heirs. So, they should ensure that they prepare a Will and align the nominees of their accounts/ folios with banks and financial institutions. Further, they should also address any digital assets that they may possess, such as e-wallets, social media accounts, and cryptocurrency wallets.

The gist

To summarize, while financial planning may seem to be overwhelming for new earners, it is not so. As elucidated above, spending cautiously, avoiding debt traps, creating an emergency corpus, procuring adequate health and life insurance, and imbibing a goal-based investing approach are important steps. Formulating an estate plan is another key aspect.