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7 ways to protect yourself in a bad economy

Falling economic growth, fewer job opportunities call for a smart response to handle your finances well. Here’s how you can make a small beginning.

Recently, the Reserve Bank of India announced that India’s growth, measured in terms of gross domestic product (GDP), for the financial year 2013-14 will be around 4.8 per cent against an expected rate of 5.7 per cent. As a result of this growth in job opportunities and new job creation has taken a severe beating.

Such times calls for an urgent plan of action. It is time to chalk out how you are going to protect yourselves financially from this harsh economic winter.

To begin with, here is a small beginning.

Step 1: Protect your job

It is a fact that the Indian economy has gone into recession with the consequence of lesser job opportunities, new job creation and downsizing by companies. In such a scenario, if you are having a self-exaggerated opinion about your job market potential, it is time to take a reality check.

Opportunities to switch to a job with better prospects are receding fast. There could be situations when you may to face downsizing too. So what should you do?

Hang on to your job, even if it means a lower pay.

Step 2: Check spending on your credit card

Many young Indians who have a decent job have acquired the habit of having several credit cards. They keep on juggling the payment of credit card bills against the purchases made. Once you have acquired the habit of buying against credit card, it is difficult to come out of it.

Buying (mostly impulsive) is very addictive. Strong adverse situations need strong measures. Keep one credit card and surrender the rest.

Step 3: Reduce debts

Yet again, many Indians are burdened with a number of debts: home loan, credit card outstanding bills, car loan, personal loans, and even educational loans. Even if many of them earn double income 75 per cent of this income goes into repaying debts. It is as if there were no tomorrow. Buy today and pay later is a trap. Borrowing is using tomorrow’s income today.

When tomorrow’s income has become uncertain, it is time to reduce debt by postponing buying of assets and looking for opportunities to repay debt from available savings.

Step 4: Relook at your insurance cover

Paying for car repairs, medical bills, unexpected thefts at a time when there are chances of your income reducing is painful. Having insurance cover for these is like doing the proverbial nine stitches on time. Of course, you might have the nightmarish experience of losing money in ULIPs, an investment cum insurance product for which you have fallen for, ignoring the fact that insurance is not investment but having a cushion for emergencies like repairs and maintenance, falling sick or meeting up with an accident, situations which no one expect but happen. Insurance is the most useful tool in such situations without denting your savings.

Step 5: Take calculated and affordable risk

Risk taking comes naturally to young people compared to the elder ones. Also, taking risk is a part of an active life. However, knowing one’s own risk appetite and risk bearing ability are important. Taking risk is easier in a growing economy, as increasing income is a certainty. Not so in a downturn, where the income in the immediate future is likely to fall. Hence the tendency to take undue blind risk needs to be curbed.

Step 6: Own assets according to your needs

Creation of assets is to be linked to genuine needs and not satisfying fanciful dreams. If an Alto serves your need then buying a sedan can always be postponed. If a one-ton air conditioner is cooling enough avoid a bigger AC. If a one-bed or two-bed room apartment is sufficient for your needs buying a 3 or 4 bedroom apartment can be avoided. 

Step 7: Asset allocation is the key to investment success

There are risky investments and risk free investments. You need to choose a combination of both. Based on the required rate of return and risk appetite you need to create your asset allocation.

Asset allocation brings discipline to your portfolio. It stops you from tempting to time the market. By rebalancing and maintaining the asset allocation periodically, you reduce the overall risk.

Asset allocation helps you to book profit when the markets are up and help you invest when the markets are down. Thus eliminate greed and fear and bring emotional balance to your portfolio management.

Economic cycles are part of life. One should be prepared for both, the good times and the bad times.

The author is an MBA (Finance) and Certified Financial Planner. He is the director and chief financial planner of Holistic Investment Planners (holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.