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4 personal finance lessons from 2020 that you must not forget in 2021

As financial exigencies come unannounced, ensure that you park your emergency fund in instruments that allow instant withdrawals

December 30, 2020 / 10:13 AM IST

The economic disruptions caused by the COVID-19-induced lockdowns led to widespread pay cuts, layoffs, liquidity constraints and non-repayment of debt obligations, adversely impacting the finances of a large section of our population. These disruptions re-affirmed the importance of following financial strategies crucial to maintaining long-term financial fitness. Those who followed these strategies were able to weather the pandemic-induced disruptions better than others who didn’t.

Factor in your loan obligations in your emergency fund

 The income disruptions caused by the pandemic adversely impacted the debt servicing capacity of a large section of individual borrowers, leading them to opt for the moratorium on loans and credit cards announced by the RBI. As per the Financial Stability Report released by the RBI in July 2020, about 50 percent of the individual borrowers had availed the loan moratorium as on April 30, 2020.

The only way out to ensure debt servicing capacity during such unforeseen exigencies is to have an adequate emergency fund that also factors in the EMIs and other debt repayment obligations for at least a six-month period. Those who had adequate emergency funds in place at the onset of the pandemic were better equipped to repay their credit card bills and EMIs despite income disruption, as compared to those who did not.

The emergency fund includes unavoidable expenses such as insurance premiums, home rent, monthly contributions towards crucial financial goals and utility bills of at least six months.

As financial exigencies come unannounced, park your emergency fund in instruments that allow instant withdrawals. Thus, park your emergency fund in high-yielding savings accounts offered by some private sector and small finance banks. Those comfortable with internet or mobile banking can also park their emergency funds in high yielding fixed deposits offered by these banks.

Continue your equity SIPs to make the most from market crashes

The global economic uncertainties and the imposition of national lockdown led the equity markets to go through steep correction during the months of March and April this year. This caused returns from even SIPs of equity funds made in the past 3-4 years to turn deep red. Many investors decided to stop their equity SIPs, fearing further losses. However, continuing the SIPs during such market turbulence is crucial, as quality shares would be available at attractive valuations. Continued SIP contributions during bearish markets also benefits their subscribers through rupee cost averaging by purchasing more units at lower NAVs. This helps in further decreasing their average investment cost without resorting to any market timing.

As equity markets started to recover steadily from the lows from April and reached new highs in November, those who continued with their SIPs throughout the year bought units at lower NAVs, averaging their investment cost. They would thereby register higher returns than those who stopped their SIPs.

Also read: How women can get started on direct equity investing in 2021

Top-up your equity MFs with lump-sum investments during bearish markets

Steep market corrections such as the one witnessed this year provide an excellent chance for wealth creation, as equities are available at attractive valuations during such market phases. Those with investible surpluses should exploit such opportunities by investing lump-sums to top-up their existing investments in a staggered manner as per their asset allocation strategy. Doing so not only allows you to reinstate your original asset mix, but also helps in building a larger investment corpus, as and when the market rebounds. However, many investors failed to exploit this opportunity, fearing losses from further market correction. Those who had the courage and wisdom to exploit the bearish market phase during March-April this year would be sitting with much higher returns as the equity market makes new highs.

However, avoid using your emergency funds or money set aside for short-term financial goals while topping up your equity investments during future market corrections. A financial emergency or the maturity of a short-term financial goal occurring during an extended bearish market might compel you to redeem your investments at a loss or seek loans at high interest rates.

Also read: CRIF report on the rise in personal loan borrowings | How to avoid a debt trap

Always ensure adequate insurance cover

The COVID-19 pandemic also highlighted the importance of maintaining adequate health cover for self and the family. The increased cost of hospitalisation due to the pandemic showed how a single case of hospitalization can wipe off the life-long savings of many. Working individuals covered under their employer-provided group health policies should also buy separate health policies, as such group health covers are mostly inadequate to meet the rising healthcare cost. Moreover, such policies also lapse as soon as you changes your job.

You should also purchase adequate term insurance, covering 10-15 times of your annual income. An adequate term policy will provide a replacement income to your dependents in the event of your unfortunate death. Those with existing term policies should increase the sum assured by purchasing fresh term policies as and when they experience a significant increase in their annual income.

Naveen Kukreja
first published: Dec 30, 2020 10:13 am