After a rollercoaster 2020, what should you focus on in 2021?
Rishad Manekia January 14, 2021
Imagine telling your 2019 self that a pandemic would spread across the world and cause massive shutdowns of the economy and create huge risks for the health of its citizens. In 2019 you would probably dismiss all of this as a crazy theory; an event that was very unlikely to occur. And yet, that's exactly what happened, you would not have been able to predict the events that have transpired.
2020 has been a year of disruptive change and has involved significant adaptation and sacrifice on the part of many people across the world. This change has accelerated some longstanding trends across the economy. Today, working from home has gone from a niche concept to the default mode of operation for many people. Technology usage has increased and there is accelerated adoption of new ways of doing things including e-commerce and virtual meetings.
One of the things that I learnt during this pandemic is how little I really need to spend to maintain my lifestyle. During the lockdown, I stopped eating out and dramatically reduced discretionary purchases and travel. These changes have now become more permanent leaving me with more money that I can set aside for the future.
It's not that I don't spend money, but that I am far more conscious of the value that a product or service brings to the table. Rather than eating out once or twice a week I much prefer to eat at home and order out from a nice restaurant once or maybe twice a month. I imagine that many others would be going through similar lifestyle changes after the initial pent-up demand has been met.
2020 has also been a year that has brought front and centre the importance of having a proper financial plan in place. Even if you did not lose your income or job, building financial security is something that has come top of mind to all savers and investors. Being prepared for unforeseen shocks prevents you from getting wiped out. This is why having an emergency fund and appropriate insurance are critical tools that can protect you financially when you most need it. They help tide over any income loss and provide protection from serious wealth erosion due to unforeseen circumstances.
Creating an emergency fund and having a financial plan also has the added benefit of reducing stress levels and anxiety. A recent poll from the FP Canada 2020 'Financial Stress Survey' found that Canadians without a financial planner were twice as likely to say that COVID-19 had significantly impacted their level of financial stress than those with a planner. This speaks volumes about the impact of proper planning for the future. This is less about having an advisor, but more about a person having control of their financial future.
Life is full of uncertainties and so focusing on things that are in your control can help increase your security and confidence in your finances. You may not be able to predict if there will be a second wave or not but what you can do is build up an emergency cash buffer of six months of your income for you to be able to deal with any income loss. If you have any loans outstanding or any financial dependants or both, that emergency corpus should increase to 9 months and to 12 months accordingly.
Having adequate health insurance to deal with any medical emergencies is also critical. You do not want to put a hole in your finances due to unforeseen medical circumstances. Rather than scrambling at the last minute to find a way to pay for expensive procedures by taking personal favours and loans, it is better to have the security and peace of mind of having an insurance that will adequately cover all your healthcare needs.
Similarly, being strategic and setting aside funds for dedicated financial goals can help you plan smartly for your financial future. If there is one thing 2020 has shown us, it is about the importance of asset allocation. Equity markets fell sharply in early 2020 but then recovered and rallied strongly through the rest of the year. On the other hand, debt investments started giving negative real returns. Different asset classes perform differently over time. Therefore, having a prudent mix of diversified investments that are appropriately invested according to the time horizon of a financial goal can give a better risk-adjusted return whilst also ensuring that you achieve your objectives.
Today we have entered 2021, you will probably see a lot of predictions for the new year in various newspapers and online. There will be many stock and sector recommendations for the highest return. Keep in mind that the same people that are giving you predictions today did not predict a pandemic or its economic consequences last year. Rather than focus on unpredictable and unknowable events, why not this year focus on the things that you can make measured progress against. In 2021 let's resolve to get ourselves financially fit by focusing on things we can control and work strategically to achieve our financial goals.
(Rishad Manekia is the Founder and MD, Kairos Capital Private Limited, a Mumbai-based financial planning firm.)