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 non-discretionary (essentials) categories. “One should do away with discretionary spending completely in these times and prioritize the non-discretionary 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.
“Avoid taking a personal or credit card loan at all costs. Seek help from your family and friends. We don’t know how long this situation will last and you don’t want to be caught in a debt trap because of this,” he advises.
According to financial educator Mrin Agarwal, Founder Director of Finsafe India and Co-founder of Womantra, those who have received pay cuts need to have a relook at their expenses and try to live frugally.
“They will need to relook at their financial goals and may need to rework on the same. For example, if someone was looking to purchase a house in the next couple of years, they will have to delay or drop the goal for now. The immediate priority is to ensure that essential expenses are met and savings is built for the next few months,” she explains.
For those who have taken loans and have the burden of paying EMIs with a reduced income, she recommends trying to get their loan repriced and possibly replacing the existing loans with cheaper loans.
“For example if a person has a personal loan then one may consider taking a gold loan since it would be cheaper. Further, they should create a plan to pay off non-essential loans while maintaining enough liquidity,” Agarwal adds. One must focus on financial security by building an emergency corpus, ensuring that they have adequate life and medical cover.
“Focus on increasing savings by reducing expenses and do not forget to review financial goals and plans regularly. I find people are looking at short-term needs and not planning for the long term. There should be a good balance of both,” she opines.
While times are tough, but those who are facing the brunt of this must remember that this is a temporary situation and economies will bounce back and therefore, the primary financial objective should be to weather the storm with minimal impact. Before the pandemic gripped the world, most people had financial plans and goals for the immediate and distant future. A salary cut or loss of a job may have hampered these plans to certain extent.
According to Harsh Jain, Co-founder and COO, Groww, with reduced or no source of income, the first thrust can be towards redeeming investments to make liquid cash available for emergencies during such situations. However, he cautions against panic selling as it would only do more harm than good. He advises them to take a step back and revisit their personal finances and investments.
“Create a new budget according to the current situation. Lesser income, rising prices, and uncertainty about the future can render the earlier budget ineffective. Hence, everyone must create a budget based on this situation to manage their finances effectively. Knowing the new set of ‘needs’ and ‘wants’ will help create an emergency fund accordingly too,” he explains.
Jain also advises rebalancing the risk element of the investment portfolio since before the lockdown, every investor had a specific risk tolerance that would have changed post these two-and-a-half months of lockdown.
Especially for those who have lost a whole or part of their regular income, he suggests setting up a systematic withdrawal plan to get regular income instead of redeeming all investments at one go which can be counterproductive in the long run.
“If the individual is facing a salary cut but still has some amount left for investments, then he or she can consider investing in liquid funds for their minimal capital risk, the efficiency of returns, liquidity, and minimal entry or exit loads,” Jain adds. “In a nutshell, experiencing a salary cut or job loss should not deter people from their financial goals. However, they need to align themselves with the changes that this crisis is ushering in.”
Jashan Arora, Director, Master Capital Services, agrees and adds that with this disruption, it is a time to revisit financial plans and re-evaluate the risk profiles as this situation might have changed one’s ability to take and absorb risk.
“Financial goals need to be weighed and checked and priorities need to be set out again and thus investment realignment is required. Management of debt needs should be looked at with utmost priority as well. This situation has given every individual an opportunity to look deeply on the spending as at this time only one can assess the discretionary spending and check whether that spending is really needed even after this pandemic is over,” he advises.
There is a financial planning rule of thumb that says that one should have at least six months of monthly expenses parked in an emergency fund for unforeseen circumstances like the one we are witnessing now. In the sectors that are directly and severely impacted from this pandemic, there are some companies, which did not let the effects pass on to its employees yet. According to Arora, those who are lucky to be among them should see it as a lesson to accumulate an emergency fund to prepare for any unforeseen events like job cuts or loss by saving their discretionary spending which they would have otherwise spent on eating out, shopping or travel.
“Also, one should seek to utilize this spare time to upskill oneself, as this would help you to make yourself an important asset to your company,” he adds.
One good news for those whose income is affected because of this crisis is that the Reserve Bank of India (RBI) has allowed banks to offer a moratorium on fixed-tenure loans anticipating the impact of the pandemic on the economy and possible job losses or salary cuts. If one has lost their jobs or experienced a huge salary cut making EMI payments very difficult, then they can opt for this moratorium facility and push the loan repayment schedule back by six months, Groww COO adds.
“It is important to remember that he or she will have to pay these installments later and also pay the interest for the moratorium period. However, this relieves him of the pressure of having to pay the EMIs during these difficult times,” Jain explains.
For those who invest in the stock market, there is a need to take a cautious and calculated approach in the present uncertain scenario, as markets, both globally and locally, are still digesting negative news flows, according to Aamar Deo Singh, Head Advisory, Angel Broking. He recommends a hard and rational look at one’s existing portfolio.
“Culling out non-quality stocks, which are faced with difficult scenarios in the coming future, should be number one priority. Secondly, ensuring that the portfolio is not overweight on any specific sector, particularly the financials, as this sector could face the brunt of the ongoing COVID-19 environment. Also, investors need to adopt a wait and watch approach, in case they are unable to fathom the current market conditions, as there is always another day, and there is always another opportunity. Lastly, not risking all of the money in any single stock is definitely advice worth paying attention to, as many a time, some investors bet it all on one stock, and then leave it to the “lady luck” to decide their fate, which is never a good idea,” he explains.
For those who may not have had a salary cut but are working in sectors which are adversely affected like tourism, hospitality and media, he advises not to take rash decisions while investing, which one may regret later.
“Treat and protect your capital as a scuba diver protects his oxygen supply. And lastly, learning to live with uncertainty and volatility, is something that everyone needs to get accustomed to, as the current ongoing crisis does not seem to be going away anytime soon,” Singh concludes.