The pandemic is a major concern in every corner of the world and has brought the global economy to a grinding halt. So, with so much going on, should we stop planning for our goals?
Financial Planning is very crucial in these times because people are becoming financially anxious. People are worried about not having enough cash handy, making mortgage payments, losing their jobs, handling medical bills, and achieving financial goals. These are all valid reasons to be worried, and financial planning could put you at ease.
Just like how you need to prioritise your physical health, it’s important not to neglect your financial health. Here are a few tips to get your financial health in order.
Medical Reserve & Health Insurance
Health insurance is an essential component of your financial health. During a medical crisis like the pandemic, you don’t know how much you’ll have to spend on healthcare. Healthcare has become more expensive and we all want the best facilities for our families. Rising medical treatment costs and soaring medicine prices can drain savings quickly. A comprehensive health insurance policy is one way to minimize your out of pocket expenses during a medical emergency.
The alternative is to maintain a separate reserve only for medical emergencies. This is suitable for the elderly who may not be covered by an insurance plan or for those with excess liquidity. With a medical reserve, all expenses are out of pocket, whereas with a health insurance policy your expenses are limited to the premiums.
If you don’t have a health insurance plan – now is the best time to insure yourself.
Check Your Lifestyle
There’s no time like the present to assess how well you can manage without discretionary spending. Going out to the movies, dining at restaurants, and other activities are curbed. Make sure you’re putting away your extra savings into your emergency fund. During good times, spending lavishly doesn’t materially affect your financial position. As important as it is to tide over the present financial crisis, it’s equally important to be financially prudent when your income drops substantially or even stops.
The RBI foresees a possibility of a global recession. Recessions are scary – you may have to deal with challenges like unemployment, pay cuts, inflation, and a depreciating rupee. Not all of us are prepared to manage financially if we had to let go of a month’s worth of income in a crisis. Many of us are learning tough financial lessons the hard way. Even if you’re fortunate enough to retain your income as the country locks down, there’s no harm in being prepared.
Having an Emergency Fund or a Contingency Reserve will help you meet the current liquidity problems. Your emergency fund should be easily accessible and should offer modest returns. Here are a few options to park investments for an emergency:
- Separate Savings Bank Account
- Liquid & Low Duration Funds
- Short-term fixed deposit
Of the lot, debt mutual funds are the best option. Debt Mutual Funds are
- Tax-efficient (you pay tax on profits only when you withdraw funds),
- Easily accessible (redemptions settled in T+1 working days) and
- Offer slightly better returns than a savings account or a fixed deposit.
But what if you don’t have an emergency fund yet?
The first thing to do would be to start saving aggressively over the next few months with whatever income you receive. Salaried employees also have the option of withdrawing from their provident funds for emergencies per Government order. The Indian Government has allowed all Provident fund account holders to withdraw 75% of the non-refundable advance or 3 months wages whichever is lower.
With so much uncertainty about salaries, jobs, and financial markets, an emergency fund could help you sleep better at night.
In trying times, credit seems the easiest way out to manage liquidity issues. Interest rates vary from one financial institution to another. Minimizing your liabilities should be your focus. However, if push comes to shove and there is no way out – evaluate all your options and have a clear action plan for how you’ll settle your loan.
Most people fall into the debt trap when they have too many loans or default on their loans. The best way to tackle the situation is to minimize your debt and make timely payments. For those staring at job or income loss – repaying loans will be challenging.
To provide relief, the Reserve Bank of India (RBI) has asked all financial institutions, to provide a moratorium on term loans outstanding for 3 months. The instalments include payments falling due from March 1 to May 31 such as the principal and/or interest components. This means EMI will not be deducted from bank accounts for the next three months. The loan EMI will restart after three months. Even credit card dues are eligible for the moratorium. A moratorium isn’t a free pass – interest on your loan will accrue for the next three months. If you have the money, don’t skip a payment.
A good financial plan creates buffers for your goals. This strategy ensures that your goals are cushioned against uncertainties. Planning ahead reduces the stress of achieving your financial goals. If you’re behind your targets – now is the time to scale up. If you’re very close to your goal consult a professional investment advisor or financial planner to explore your options.
A professional Financial Planner can help you overcome financial instabilities through proper planning for every goal and accounting for contingencies. Make a Financial Plan today and be stress-free!