List all unavoidable expenses such as rent, groceries, transportation, education and medical bills.
Layoffs in technology and other sectors continue to make news periodically.
Those who lose their jobs have to grapple with multiple financial challenges: The salary they had come to view as a constant stops, but household expenses must still be met and equated monthly instalments (EMIs) still be paid.
The employer's health insurance also terminates.
Key Points
- Calculate your financial runway by comparing essential expenses with liquid savings.
- Reduce discretionary spending without eliminating all leisure activities.
- Pause salary-funded SIPs and use emergency funds before tapping investments.
- Prioritise home and vehicle loan EMIs and convert credit card dues into EMIs if needed.
- Arrange health insurance before employer coverage ends and explore policy migration.
Calculate your runway
Begin by estimating the household's minimum monthly expenditure.
List all unavoidable expenses such as rent, groceries, transportation, education and medical bills.
"Include annual expenses that will fall due over the next six months," says Renu Maheshwari, Sebi-registered investment advisor, cofounder and principal advisor, Finscholarz Wealth Managers.
Next, take stock of liquid and relatively liquid assets.
These include bank balances, fixed deposits, liquid funds and debt mutual funds.
Compare the available financial resources with monthly expenditure to estimate how long the money can last.
"For a more conservative estimate of the financial runway, rely primarily on fixed-income assets, as equity fund valuations tend to fluctuate," says Maheshwari.
Cut expenses selectively
Discretionary spending needs to be pared.
Luxury purchases and spending on upgrading the house should be postponed.
Dining out, movies and similar entertainment expenses should be reduced, though not eliminated completely.
"Excessive spending cuts can compound the psychological stress caused by unemployment," says Maheshwari.
Pause SIPs, change asset allocation
While using your savings, dip into the emergency fund first.
Fixed deposits come next, followed by debt funds.
"If markets are favourable, book some profits in equities," says Maheshwari.
Systematic investment plans (SIPs) funded by the monthly salary will have to be stopped.
Asset allocation may also need to change.
"The investor's capacity to take risk falls drastically, so portfolio risk must come down," says Maheshwari.
However, investors should not exit equities completely.
Protect critical repayments
When cash flow becomes strained, the payment hierarchy should be based on the consequences of default rather than only on the interest rate.
"Secured loans such as home and vehicle loans warrant priority because they are linked to underlying assets," says Vinay Singh, cofounder & chief product officer, Olyv.
As for credit card debt, pay minimum dues on time to prevent an impact on the credit report.
While this means the account will remain current, the outstanding balance will grow rapidly.
Credit card revolving interest can be 36 to 45 per cent a year.
Convert the outstanding balance into an EMI.
"Many issuers offer such conversions at 12 to 18 per cent," says Ritesh Srivastava, founder & CEO, FREED.
Act before missing a payment.
"Once there is a default, issuers may tighten terms or not offer conversion," says Srivastava.
Approach the lender early
If an EMI is likely to be missed, contact the lender before the due date.
"Early engagement improves the possibility of reaching a workable arrangement," says Singh.
Lenders may offer restructuring in cases of genuine hardship.
"The options could include a moratorium of three to six months or an extension of the loan tenure," says Srivastava.
Secure health cover
Find out when the employer's group health cover ends and begin exploring alternatives before there is a break in coverage.
"Under Insurance Regulatory and Development Authority of India (Irdai) provisions, migration from a group health policy to an individual or family floater policy with the same insurer is available," says Arun Ramamurthy, cofounder, Staywell.Health.
Contact the insurer and request migration.
"Check the terms, premium and sum insured of the new policy.
"Confirm which family members will be covered, what continuity benefits will be recognised, and which waiting periods will apply," says Ramamurthy.
An individual policy may offer different benefits and can be significantly more expensive.
"Migration is also subject to underwriting," says Ramamurthy.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff
