New normal: Personal finance rules in a post covid world

Covid-19 took the world by surprise and destroyed economies and businesses. Job losses have hit families and dented household incomes. Amid the heightened uncertainty, having financial foresight has become crucial for Apurva and his small family of three– including his wife and 5-yearold daughter. Adding to his worries is the fact that he and his wife work in the financial sector, which may be adversely affected. The next few years need to be viewed with caution, as uncertainty looms large on the horizon. Apurva wonders if there are some measures he can take in the short as well as the medium term to tide through this time smoothly.

The first course of action is to redraft the household budget. The idea is not to curb every petty expense but to follow a more conservative lifestyle by avoiding certain discretionary spends. While Apurva may be tempted to keep all their money liquid, it may not necessarily be beneficial for the long-term aspirations. Focus should be on increasing savings; it is advisable to earmark at least 10% of their financial portfolio towards savings products.

Apurva must also review the family’s portfolio to find avenues for short-term liquidity. However, he should avoid any abrupt decisions like liquidating all their assets. If he is hard-pressed for money, he can start by liquidating a bank FD or debt funds instead of equity-linked investments. Unless in survival mode, one should not dip into savings earmarked for retirement or child’s future planning. Simple measures like moving investments from high-risk to low risk ones can also make a huge difference. It might also be a good time for Apurva to review his portfolio to ensure that his investments aren’t hurt in the near term.

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A big worry, in the event of a job loss, is paying EMIs. In order to be prepared for any such eventuality, Apurva must connect with his bank and figure out the terms of an EMI holiday for a few months as against lowering of EMI and extension of the tenure. Even though he might be tempted to frequently use credit cards, he must avoid it as irresponsible use of credit cards can put his finances in complete disarray. He must create a plan to repay his credit card dues over the next 2-3 months.

Apurva must evaluate guaranteed savings and income plans towards long term goals, such as retirement. It might be an opportune time to evaluate annuity or pension plans. This pandemic has shed light on another crucial element of financial planning– need for term and health insurance. Apart from making a massive dent in a family’s savings, lack of protection leaves the family grappling with undue stress in the event of an mishap.

The best course of action for Apurva would be to evaluate his long-term goals, current income levels, likelihood of income loss, and provisions for any emergent financial impact like health risks.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)



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