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Start to save today to survive tomorrow

By Bindisha Sarang
April 07, 2020 09:00 IST
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In times such as these, you need to make every rupee count. Use the money you save to add to your investments or to buy medical insurance, instead of subscribing to more OTT platforms, suggests Bindisha Sarang.

Illustration: Uttam Ghosh/

Now that we have spent more than a fortnight under the lockdown, and got a fair idea of what it entails, it's time to stop fixating on our fears and anxieties around Covid-19 and instead search for answers to more practical problems -- like what these changes mean for our finances.

Many may have to accept salary cuts.

Some may even have to deal with a no-pay cheque scenario.

Hence, it is imperative that we monitor our cash flows more carefully than we normally do.

Those who already have a household monthly budget need to tweak it, while those who don't need to develop one right away.


Prepare for multiple scenarios

First, assess your current financial situation.

Get a clear picture of your income, expenses, assets, liabilities, insurance cover, and the likes.

Next, plan for at least three scenarios.

Says Ashok Shah, chartered accountant and founding partner, NA Shah Associates: "While reassessing your budget, think of various scenarios and how you will respond to them if they do materialise -- the worst-case scenario, a normal scenario, and a best-case scenario."

The worst-case scenario could be a job loss, or a substantial pay cut of 20-30 per cent.

A normal scenario would be one where things don't change much for you financially.

And the best-case scenario would be one where your income doesn't change, but the lockdown and work-from-home result in considerable savings for you.

Shah says you need to predict your cash flow in each of these scenarios and check how many months you can survive.

He further adds: "Take a scenario where there is a sickness next month.

"You can't say I will spend on that after three years.

"You have to provide for such exigencies.

"You also need to develop a strategy for disposing of assets in case matters worsen.

"This will help you avoid a fire sale."

Curtail expenses

Irrespective of which scenario pans out, this is a time to reduce your costs further.

Many expenses have automatically got curtailed, like going out for movies, eating out, shopping at malls, etc, thanks to the lockdown.

Says Mumbai-based certified financial planner Pankaj Mathpal: "Keep your variable expenses low, even while you are at home.

"People who already have one over-the-top (OTT) media service are nowadays subscribing for additional ones.

"Avoid adding to your expenses in these difficult times."

Remember, expenses are of two types -- fixed and variable.

The variable category can be divided into two parts -- the essential variable expenses and the discretionary ones.

Essential variable expenses are those you cannot live without, such as groceries, electricity bills, mobile bills and other utilities.

Entertainment cost, on the other hand, is something you can curtail since there are already so many free resources out there today that you can make do with.

Ensure liquidity

Next, check out how much money you have that can be accessed easily and at short notice.

As Mathpal says: "The most important thing you need to have in these uncertain times is liquidity."

Ideally, if you have six months of expenses in an emergency fund, that should suffice.

Those who foresee higher probablity of job loss may enhance it to 9-12 months.

The transportation cost you are saving these days can go towards building this corpus.

Even if it is not much, it's a start. Says Gaurav Rastogi, chief executive, "If you don't have emergency funds in place, then divert whatever amount you can save in future into liquid funds."

Lower your interest burden

Banks are currently offering a three-month EMI deferment on many loans at the Reserve Bank of India's (RBI) behest.

"If you can afford it, it's best to avoid a moratorium. Go for it only if you have no money and hence no option," says Mathpal.

By forgoing the moratorium, you will save on interest cost.

Also, look for opportunities to lower your interest burden.

Suppose that you had taken a personal loan last November at a higher rate, and interest rates on these loans have now reduced.

You can switch your loan to a lender offering a cheaper rate.

"Ensure that the new lender doesn't have a large processing fee and savings from the switch are substantial," adds Mathpal.

Don't stop your investments

If your salary has been cut, you may perhaps not be able to continue to invest the same amount anymore.

But that doesn't mean you should stop investing entirely, especially if you have an emergency fund in place.

Says Rastogi: "Assume that this lockdown will get resolved in the next three to six months. For most people, expenses are expected to decline 30-40 per cent. On the other hand, salaries may not go down by more than 10-15 per cent over the next six months for most. Economists all over the globe are saying there will be a huge rise in private savings over the next six months, including in India."

Rastogi says each person needs to assess the probability of his income going down over the next six months.

"If your salary isn't likely to be cut, or may not be cut much, and your expenses will come down, you will generate a surplus that you should invest. If you don't have the stomach for equities, go for lower-risk investment instruments," he says.

Finally, take a few risk-mitigation measures, if you have not already.

Says Mathpal: "Even if your employer provides medical insurance, buy a personal cover for your family at the earliest. Job loss is a real possibility in the current economy."

In times such as these, you need to make every rupee count.

Use the money you save to add to your investments or to buy medical insurance, instead of subscribing to more OTT platforms.

As Shah says: "Live short today so that you can survive long later."

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Bindisha Sarang
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