People affected by the coronavirus crisis in any aspect of personal finance may change their approach in the future when dealing with money – they will be more careful. But if you haven’t been hit yet, this crisis should act as a wake-up call. Adversity often comes when you least expect it – it pays to be prepared.
Planned decisions will allow you to weather the crisis with minimal 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 the growth pattern to continue uninterrupted. But disruptions are still happening – whether it’s the dotcom bust of 1999, the US subprime mortgage crisis of 2008, or the current coronavirus pandemic. Such economic disruptions lead to business closures and job losses. Future income is not guaranteed, especially for small businesses and private sector employees.
“We all tend to assume that life will be smooth and always on the upward trajectory. But real life has a lot of ups and downs. from now on as an integral part of personal financial planning,” Suresh Sadagopan, Founder, Ladder 7 Financial Advisories.
The emergency fund is essential for a resilient financial plan
Unless a financial plan has a good supply of emergency funds, it is bound to crumble in a crisis like the current crisis. “We don’t know how the coronavirus-induced crisis is going to unfold. We will all need to be ready with emergency cash/provisions to deal with unprecedented times. This is a lesson many people are learning now, the hard way. It makes sense to set aside money for such situations, well in advance. We should maintain such buffers at all times,” says Sadagopan of Ladder 7 Financial Advisories.
Lack of emergency funds will force you to either sell your distressed investments or borrow at high cost, jeopardizing all your future goals. So, if you’re financially unscathed during this crisis, it’s time to create an emergency fund that can come to your rescue if you face a loss of income. One should ideally have an emergency fund that can support at least 6 months of expenses.
Be careful with borrowings – it’s a double edged sword
The more you borrow, the harder it is to manage the demands of life such as the current pandemic. No one could have imagined a pandemic that would leave even the most secure streams of income vulnerable. If you have borrowed a lot, you may be forced to pay your EMIs. This can easily escalate into a debt trap where you will have to borrow more to pay off expensive debt.
In the ideal scenario when you have a stable income, experts advise not to let your EMI exceed 50% of net monthly income. However, if you use your borrowing limit wisely with low credit usage, it not only helps you easily manage debt repayment during tough times, but also helps you use your unused credit limit to manage debt problems. temporary cash.
Make sure you have financial protection before investing
Lack of adequate financial protection can leave your family defenseless against any eventuality. Insurance provides you and your family with financial protection at the lowest cost. Beyond the emotional pain, the loss of a paid member during the pandemic will cause financial hardship. You don’t have to wait for a good time to buy adequate life insurance coverage for the family. Even if you opt for the last-minute purchase of health insurance, the month-long cooling period and waiting period for many illnesses will expose you and your loved ones to a critical phase. Therefore, all other life priorities must wait until you provide adequate life and health insurance protection for your family.
You can manage life with less expense
Many claim that their monthly budget is so tight that they have no opportunity to save more. But the lockdown has shown that life can be managed with only essentials. This is an important lesson for many who do not want to identify the high amount of discretionary spending in their budget. These are expenses that can easily be reduced.
“A lot of spending is discretionary. But people still insist that it’s 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 largely cut off,” Sadagopan says.
Yes, you can save more than you think
The lockdown forced people to manage their lives with the bare minimum for almost 2 months and so the monthly savings obviously increased. While it will be difficult to maintain this once the lockdown is relaxed, you can still take advantage of this experience to increase your savings.
“Our country does not have a strong social protection system. Therefore, at the end of the day, our savings are all we can count on. Unfortunately, household savings have recently declined due to the increase spending on travel and durable goods. Now is the time to be prudent with your finances as a reduction in monthly income and an inflationary increase in costs are expected in the days to come. Those who have focused on investments liquids or who have kept an emergency fund aside for times like these will certainly be comfortable,” says Tarun Birani, Founder and CEO, TBNG Capital Advisors.
Accept corrections smoothly while investing in stocks
When a bull market continues for a long time, many new investors believe it is a one-way street to growth. However, stocks are an asset class that not only experiences the usual daily volatility, but also periodic major crashes. Investors who go through such crashes become wiser with experience. However, many who witness an accident for the first time panic.
“While investing in stocks one should be prepared with the possibility of a 30% to 40% pullback and should avoid the same if not ready for the same keep a close eye on your portfolio and check if a rebalancing is needed. Above all, remember at all times 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 risk” Birani .
However, each crash so far has been followed by a robust recovery in 3-5 years. So, if you have a long-term horizon, you don’t need to panic and follow what others are doing. “During uncertainties, people are hardwired to follow a crowd. We tend to be scared when others are scared, which in financial markets works the opposite of a buy low, sell high strategy. My advice is to be careful where you invest your hard-earned money, especially if it is a short-term investment and keep your appetite in mind at all times. for risk. At this time, it is best to invest in stock markets with a long-term view,” says Birani of TBNG Capital Advisors.
Don’t blindly invest in debt funds
The main misconception that many investors have with debt funds is that all debt funds are safe. The reality is that many debt funds are very risky, like credit risk funds. “According to SEBI, fund managers are supposed to invest in credit-risk funds with at least 65% of assets in papers below an AA rating. In the current scenario, there has been an increase in redemptions , which, combined with the fund manager’s inability to sell its undervalued holdings in the bond market to meet these redemptions, is where the chaos occurs,” says Birani.
Therefore, before investing, you need to be clear about your risk appetite and the objective of your investment. If you want capital protection and can manage with low yields, you should stick to 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 therefore should be stable, while equity instruments should carry risk. According to this principle, investments in debt should only be in portfolios of high quality that have high credit ratings and are less susceptible to risk, which in turn secures an investor’s capital,” says Birani.