People affected by coronavirus crisis in any aspect of personal finance will possibly change their approach in future when dealing with money - they will be more prudent. But if you have not taken a hit yet then this crisis must act as a wakeup call. Adversity often arrives when you least expect - it is better to be prepared.
Planned decisions will ensure you tide over the crisis with minimum damage to your finances.
Here are some important lessons from the current crisis:
Don't think future income is guaranteed
Many while making future financial plans consider their current income and expect growth pattern to continue without any disruption. But disruptions always happen - be it the dotcom bust of 1999, US subprime crisis of 2008 or the current coronavirus pandemic. Such economic disruptions result in shut businesses and job losses. Future income is not guaranteed, especially for small businesses and employees in private sector.
"We all tend to assume that life will be smooth sailing and always on the upward trajectory. But, real life has lots of ups and downs. We need to recognise that and start maintaining liquidity/ contingency/ emergency provisions at least from now on as part of the personal financial planning," Suresh Sadagopan, Founder, Ladder 7 Financial Advisories.
Emergency fund a must for resilient financial plan
Unless a financial plan has good provision of emergency funds it is bound to fall apart in a crisis like the current one. "We do not know how the crisis induced by coronavirus is going to pan out. All of us will have to be ready with liquidity/ contingency provisions to face such unprecedented times. This is a lesson many people are learning now, the hard way. It makes sense to put aside money for such situations, well ahead of time. We should maintain such buffers at all points," says Sadagopan of Ladder 7 Financial Advisories.
Lack of emergency funds will force you to either go for distress selling of your investments or high-cost borrowing, which will jeopardise all your future goals. So if you are unhurt financially during this crisis, it is time you create an emergency fund which can come to your rescue if you are confronted with any income disruption. One should ideally have an emergency fund which can take care of at least 6 months of expenses.
Be cautious with borrowing -it is a double-edged sword
The more you borrow the greater the difficulty in managing life exigencies such as the current pandemic. Nobody could have imagined a pandemic which would leave even the most secured income stream vulnerable. If you have borrowed heavily you may face constrain in paying your EMIs. It can easily escalate into a debt trap in which you will have to borrow more to service costly debt.
In ideal scenario when you have stable income, experts advise not letting your EMIs go beyond 50 per cent of 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.
Make sure you have financial protection before investing
Lack of adequate financial protection can leave your family defenceless against any eventualities. Insurance gives you and your family a financial protection at the least cost. Beyond emotional pain, loss of an earning member during the pandemic will lead to financial woes. One should not wait for a favourable time to buy adequate life insurance cover for family. Even if you go for last-minute purchase of a health insurance plan, the one month cooling period 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 adequate life and health insurance protection to your family.
You can manage life with less expenses
Many claim their monthly budget is so tight that they does not have any scope for further savings. But the lockdown has shown life can be managed with just essential items. It is an important lesson for many who are unwilling to identify the high quantum of discretionary expenses in their budget. These are the expenses which can easily be reduced.
"Many expenses are discretionary. But people always insist it is essential. During this crisis, people have seen that they can live a basic life without the trappings and frills. They will most likely understand the fact that many of the so-called essential expenses can be done away with for the most part," says Sadagopan.
Yes, you can save more than what you think
The lockdown has compelled people to manage their lives with the bare minimum for almost 2 months and hence the monthly savings have obviously increased. While it will be difficult to maintain this once the lockdown is relaxed, you can always use this experience to increase your savings.
"Our country lacks a robust social welfare system. Hence, ultimately our savings is all we can bank on. Unfortunately, household savings have seen a decline lately due to higher expenditure on travel and durables. This is the time to be prudent with your finances since a reduction in monthly incomes and inflationary increase in costs is expected in the days ahead. Those who have focused on liquid investments or have kept aside an emergency fund for times like these will certainly be at ease," says Tarun Birani, Founder & CEO, TBNG Capital Advisors.
Take corrections in stride while investing in equity
When a bull market continues for a long period many new investors get in thinking it to be a one-way street towards growth. However, equity is an asset class which not only has usual daily volatility but also major periodic crashes. Investors who go through such crashes become wiser with experience. However, many who witness a crash for the first time panic.
"While investing in equity one should be prepared with possibility of a 30 per cent to 40 per cent drawdown and should avoid the same if not ready for the same, keep a close eye on your portfolio, and check if a re-balance is necessary. And most importantly, at all times remember to keep your biases in check and avoid any knee-jerk reactions. Don't let your short-term decisions put your long-term capital at stake" Birani.
However, every crash has so far been followed by robust recovery within 3-5 years. So if you have a long term horizon you do not need to panic and follow what others are doing. "During uncertainties, people are wired to follow a crowd. We tend to turn fearful when others are fearful, which in financial markets works inversely to a buy low, sell high strategy. My advice is to be cautious of where you are investing your hard-earned money, especially if it is a short-term investment and at all times keep in mind your risk appetite. At this period it is best to invest in equity markets with a long-term view," says Birani, of TBNG Capital Advisors.
Don't invest blindly in debt funds
The major misconception which many investors have with debt funds is that all debt funds are safe. The reality is that many debt funds are very risky such as credit risk funds. "As per SEBI, fund managers are expected to invest in credit risk funds that have at least 65 per cent of assets in papers below an AA rating. In the current scenario, there has been a surge in redemptions, that combined with the inability of the fund manager to sell its underrated holdings in the bond market to meet these redemptions is where mayhem occurs," says Birani.
Therefore, before investing you should be clear about your risk appetite and objective of your investment. If you want capital protection and can manage with low returns then you should stick with safe debt funds like liquid, money market, or overnight funds with high-quality debt securities. "The rule of debt is to protect an investor's capital and hence has to be stable, while equity instruments should be the risk bearers. Following this principle, investments in debt must be solely in high-quality portfolios that have high credit ratings and less susceptible to risks, which in turn keeps an investor's capital secured," says Birani.
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