Outlook Money|June 2020
With the whole nation under lockdown for almost two-and-a-half months now, the wheels of the economy have been forced to a stand still, so much so that a recession is the most likely outcome. In such a scenario, many organisations have decided to take some drastic steps to reduce their operational costs, including salary cuts for their employees, and even lay-offs in certain cases. The travel and leisure industry and the media industry are the worst hit while no sector has been left untouched by this crisis. While some surveys predict two in five employees facing salary cuts, others indicate at one-fourth of corporates already announcing pay cuts while many others actively considering such a step.
For those who now have reduced income due to pay cuts, while the same level of liabilities, the big question is of survival. With their financial planning turned upside down due to this new reality, it is time to revisit and re-plan their financial goals and explore new possible ways to achieve them.
According to Anurag Jhanwar, Co-Founder and Partner, Fintrust Advisors, COVID-19 has brought back peoples’ focus on the importance of personal financial planning, within which the key focus today is on survival, with necessity taking precedence over other discretionary items. “With the lockdown and closure of activities, there has been collateral damage to the widespread masses and as cash flows dry up, there is need for people to be very prudent with money and choice of spending,” he says.
The principles of financial planning usually encourage and help clients in creating an emergency or contingency fund. Such a fund usually equals six months of family expenses. So, those who have their emergency fund in place are better off in these challenging times of lockdown.
Jhanwar says that in these times, it is critical for everyone to do budgeting exercise marking the expenses into discretionary and nondiscretionary (essentials) categories. “One should do away with discretionary spending completely in these times and prioritize the nondiscretionary expenses. These are also the times when it is important to take your family into confidence while doing budgeting to avoid any kind of discontent later,” he explains.
One question usually asked in such times is should one continue with their term plan and SIPs? According to Jhanwar, term plan (or pure insurance) is a must and one needs to continue the same. “Other investment policies should totally be aligned as per the cash flows. If cash flow permits, one should continue the SIPs.”
At such times of crisis, it is very crucial to take financial decisions only after reviewing all options carefully, says Ankur Choudhary, Co-Founder, and Chief Investment Officer, Goalwise.com.
“Go over all your expenses and eliminate or postpone everything that is not essential. This should offset a good part of the salary cut. Those who have been laid off, if you had built an emergency fund, give yourself a pat on the back, and go ahead and use it,” he said.
For those who didn’t build an emergency fund, Choudhary advises considering liquidating some of their investments starting with some risky investments like stocks and equity mutual funds, in addition to fixed deposits and debt funds in order to avoid skewing the portfolio asset allocation.
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