The world is going through an unprecedented crisis due to the Coronavirus pandemic. What began as a health calamity has now transformed itself into a full-blown economic crisis which has not only affected large industries and national economies, but also individuals’ and households’ financial situation. According to an estimate by IMF, the global economy is expected to contract by 4.9 per cent in 2020.
Closer to home, India’s GDP saw a contraction of 23.9 per cent in April-June quarter, and is expected to fall by around 9 per cent (as per Asian Development Bank’s estimate) in the full calendar year. Because of this contraction in economic activity, a large number of people have already faced salary cuts, or even job losses, and more are expected to follow. Many are facing severe liquidity crunch due to the contraction in economic activity. As per a joint study by the International Labour Organization and the Asian Development Bank, around 41 lakh youth lost jobs in India due to the COVID crisis.
The role of financial planning
Crises are not a new phenomenon. Every generation has faced some or the other form of crisis, has overcome it and emerged out stronger. One must remember that in most cases, it is impossible to predict the next crisis, but one can always be prepared to effectively respond to it by proper financial planning. The silver lining amid all the gloom is that the current crisis has also led to a lot of unplanned savings during this time as one did not spend on things like restaurant visits, transportation, vacations, leisure activities and so on. One can use this unplanned extra reserve to build a stronger foundation for a stable future.
To make this journey towards financial stability smoother, here is a list of actions one must take to protect themselves from unanticipated events and crises.
1. Build a rainy day fund: While the jury is still out on the exact amount of this emergency fund, one must have enough to cover their expenses for at least six months without any income. Some experts recommend one year’s expenses. However, this fund is not the same as the extra money parked in your savings account from which you also make your monthly expenses. A rainy day fund has to be a specific liquid fund which should be interfered with only when there is an actual emergency. The kind of emergencies that warrant the use of this rainy day fund are job losses, unplanned medical treatments, sabbaticals and other such events.
The benefits of having an easily accessible source of lump sum money are many. However, since it takes time and a lot of self-discipline to build such an emergency fund, many people avoid making this effort in the first place. But once it is built, it improves one’s confidence and the ability to deal with any unforeseen event.
2. Reduce discretionary spending: The lockdown imposed by the government was a difficult time for most people, but it also forced many into saving money. It has also brought a realisation for many that one can live within their means without much difficulty. Remember that saving is the first step towards investment. And reducing discretionary spending can help one make that first step. The idea is to reduce those expenses that one can live without and use that extra saved money towards achieving one’s financial goals.
3. Manage high interest liabilities: Debt coupled with compound interest is a lethal weapon in personal finance that can put a major dent in one’s finances. Left ignored, the debt can grow to enormous proportions, beyond your ability to repay it. That’s why one must pay off high-interest dues like those of credit cards and personal loans, regardless of one’s financial situation. In fact, one must avoid such liabilities and pay them off at the earliest.
4. Invest in mutual funds:
Mutual funds offer different kinds of investment products for different financial goals — creating an emergency fund, investing in lumpsum, planning for retirement, or investing for children’s education or marriage. Investing in mutual funds is easy and accessible for everyone. Mutual fund schemes have become mainstream now due to paperless on-boarding, online payments and a host of other services. One can start by exploring a mutual fund lumpsum calculator
to find out the amount to be invested to reach their financial goals. If one wants to invest every month, they may also use an SIP calculator. Both are easily available online. One can invest in any category of mutual funds
based on their risk profile.
5. Write a will and buy a term insurance plan: The imposed lockdown has brought people closer to their family. To ensure financial security and happiness of one’s dependents even in your absence, it is a good idea to write down your Will. A will can be written on any regular sheet of paper, but it should be very clear of the assets you hold and the persons that you want to bequeath them to. Ensure that you sign it in front of at least two witnesses who are not related in any way to your broader family, and tell the witnesses to sign it as well.
In case you have not purchased life insurance, then it is crucial to have one with a cover amounting to at least 10 times your annual gross income. These two actions would go a long way to secure the future of your loved ones in your absence, especially during times of a global pandemic.
There is no doubt that this pandemic is likely to continue to impact everyone’s personal finance for some time to come. There is also no way to predict when and how the next crisis would hit us. But what one can do is prepare for such uncertainties. The good news is that it’s never too late to prepare yourself for what’s to come, be it in personal life or in terms of financial one. The best day to start on this journey towards financial stability is always today!