The Covid-19 pandemic has not just endangered millions of lives across the globe, but it has also started to disrupt the global economy. Countless people have lost their jobs or sources of income, while many others have been asked to take a pay cut. Economies have been pushed into a recession and markets have seen years’ worth of profits booked by the investors getting wiped off in a few days. In such a difficult situation, you need to take extreme precautions to protect both your health and your wealth from getting adversely impacted by the outbreak.
Here are a few important money management tips to help fortify your finances, so that you’re able to come out of this crisis with minimal financial damage.
1. Maintain an adequate emergency fund
Having in place an adequate emergency fund is perhaps the most important thing to ensure during such a crisis. Your emergency fund will come to your rescue if your income gets restricted or you encounter an unanticipated crisis like a medical or a family emergency. And while ‘adequate’ may mean different things to different people, you’ll be well-advised to ensure your emergency fund is worth at least 6 months of your expenses. You can choose to park your emergency fund in a high-interest savings account or a fixed deposit for some capital appreciation.
2. Exercise strict budgeting measures
To be able to free up more money for your essential financial commitments like building an emergency fund, paying rent, EMIs, utilities, insurance premiums, etc. during this phase, you also need to exercise strict cost-cutting measures. Now, the lockdown might have helped in cutting down certain expenses like daily commutes, and this should help in boosting your savings. So, prioritise your expenses and cut down heavily on non-essential spends.
3. Life and health insurance should also be your priority
Try your best not to compromise on adequate insurance protection at this time. If you have a term plan, ensure you pay its premiums timely to prevent any policy lapse. Your life insurance plan will come to the rescue of your dependent family members in the event of your untimely demise. Similarly, ensure you have a medical insurance plan for yourself and your dependent family members with a coverage amount of at least Rs 5 lakh to protect your money from getting drained in footing steep hospitalization bills. If you’re dependent upon your office-provided group medical plan, you might want to go for an individual plan too as the office-provided one would stop working if you lose your job.
4. Try not to discontinue your essential investments
Investments are critical to ensure you meet your life goals and safeguard your financial future. However, a few life goals are more important than others. So, if you’re going through a cash crunch, see if you could manage without discontinuing your investments that are crucial for your most important targets. The lesser important ones or those that are not aligned to any relevant financial goal can be pruned to raise cash after factoring in the cost of liquidation like exit loads are penalties. You may also pause, for example, your mutual fund SIPs if you’re going through a severe cash crunch, and restart your investments once your finances stabilize.
5. Borrow with caution
Now many of you would be tempted to take a loan during this time, but I would suggest taking a loan only if you absolutely must. Try raising cash from other sources like emergency fund and liquidation of non-essential investments first. Also, do not over-borrow and ensure you have a clear plan in place to be able to repay your loan in full on time before signing up for it. Your financial woes will only worsen if you’re unable to clear your dues.
6. Have a ‘bounce-back’ plan ready before taking a loan moratorium
If you’re unable to meet your debt commitments during this crisis, you may benefit from the RBI’s directive to lenders to give a 6-month moratorium on loan EMIs and credit card dues. However, you must understand that interest will continue to get accrued during the moratorium which could considerably increase your loan burden, especially if you’ve just begun repaying, say, a home loan. So, if you opt for this facility, ensure you have a ‘bounce-back’ plan to repay this accumulated interest soon after the moratorium ends. Also, try not to avail the moratorium on your credit card dues as those involve interest charges in the range of 36-42% per annum.
In conclusion, crises like the one we currently find ourselves in require calm nerves and not panic-stricken decisions. I hope these tips would go a long way to help you make certain critical financial decisions so that you emerge out of this crisis unscathed.