The coronavirus pandemic continues to wreak havoc across sectors globally. Financial year 2020-21 started amid a lockdown with many of us now working from home. Still the question that remains on everyone’s mind is simply this: How safe is my job? One sectors that has been hit hard by the pandemic is civil aviation, in which many employees have already been laid off or have been sent on leave without pay. Several other sectors have made, or are contemplating similar moves.
The stock market is hitting lows not seen since the 1987 market crash. Your investments in equities may have eroded by at least 25-30 per cent, or even more. On top of all this, interest rates in the debt market are extremely low. SBI, in fact, has reduced the savings rate to an historic low of 2.75 per cent. Fixed deposits or debt mutual funds are also unlikely to yield spectacular returns. Clearly, these are unusual times. So, your financial planning need to be done differently.
1. First things first. You need to have a sizable emergency fund to overcome a temporary financial crisis. Do not disregard the possibility of losing your job. Also, in the event that you fall sick and miss work, you will be in real need of money. If you don’t have three to six months’ worth of expenses saved, then it’s time to act on it now and increase your emergency fund.
2. Keep more liquidity: One change that you need to make owing to the Covid-19 crisis is to have more cash in hand. For example, if there a medical crisis during a weekend, keeping money handy would be of great help. And the liquid emergency money should be accessible to your spouse also.
3. Prepare a list of assets you can liquidate if needed, even if they are sold at a loss or at lower prices. Your assets would typically include additional property, gold, equity, and such like. You need to have a plan to access lines of credit if your paycheck is affected by the outbreak. Also, it is advisable not to take loans against your assets.
4. How do you cut down on expenses? You can start simply by making a list of all non-essential expenditure and rank them in order of importance, then cut out the items those are least important for few months.
5. Most importantly, you need to re-evaluate your goals. Begin by checking whether you actually invested as much as you had planned to last year. The target should be to save and invest at least 30 per cent of one’s take-home salary. The correction in markets means you would have fallen behind on your goals. But well these are good opportunities too. You can either save and invest at an accelerated pace, or push your goals back by a couple of years.
For those who have suffered a salary cut or job loss, investing more may be difficult in the near term. Alternatives may have to be considered. Like, if your child plans to go to college abroad and you were earlier thinking of funding the entire expense, you may now ask him to look for scholarships or take a loan.
6. Let’s now discuss how to invest in equities under the prevailing market conditions. Because of the stock market correction, your risk apetite may have reduced and hence allocation to equities would have fallen below its pre-set level. But it is very crucial to stay aligned to your original asset allocation. How do you achieve this? Keep your SIPs going, but any incremental money you have should be directed into equities. When the market recovers, large-caps will lead the recovery. Trim your mid- and small-cap exposure and move more money to large-cap active or index funds.
7. This financial year, taxpayers will be able to choose between two sets of slab rates. You could either opt for the new tax rates announced in Budget, or stick to the existing slabs. Under the new regime, rates are lower than those prevailing under the old regime. However, those opting for new slab rates will not be able to avail certain some deductions, such as LTC, and relief Section 80C of the Income tax Act.
According to a circular issued on April 13 by the Central Board of Direct Taxes (CBDT), salaried employees need to declare in April itself which regime they will go with so that their employers can start deducting tax at source accordingly. Once you have chosen a regime, you will not be able to change it with your employer for the purpose of tax deduction. However, you will have the option to change it at the time of filing your tax return. Well, even if you opts for the new regime, there would not be any real loss, if you have chosen tax-saving options (like PPF, ELSS, medical insurance and others) wisely.
8. Buy adequate life cover: If you have begun earning, consider buying term insurance right away — in anticipation of the fact that you will have dependants and liabilities in the future. The premium for term insurance is lower when you buy it at a younger age, and it remains constant for the entire tenure. Now, the question is how much term insurance is adequate? People below the age of 40 should buy a sum assured equal to 15-20 times their take-home salary. Those above 40 should have a sum assured equal to 10 times. Since your salary tends to increase with age, a 10x cover tends to suffice after 40.
9. Don’t rely on group health cover: The current crisis has also brought home the need to buy adequate health insurance. If you are only covered by a group health policy, buy a separate cover of your own for your family. Remember that the loss of a job also means loss of the group cover.Try to buy the maximum cover you can afford at the earliest age. Companies may not be willing to hike the cover once you get older. A Rs 10 lakh cover for an individual and a Rs 20 lakh cover for a nuclear family is a good starting point. Opt for a super top-up to increase one’s sum insured as this is a more affordable option.
10. In crucial time like this, you should not consider the option of borrowing money at all, even from friends and relatives. Avoid using that credit card as much as possible. And even if you do, pay it in full always. Instead use the debit card until this financial crisis tide over. If there is a high possibility of you defaulting on existing loans, you should seek help
Lastly, if you are cable enough, use your money to help friends, family and your broader community.