The lockdown announced to contain the spread of COVID-19 in India has been harsh on many citizens. The Central government along with states has been taking numerous measures and devising strategies to make this 21-day long lockdown successful.
Problems are aplenty — right from managing the movement of migrant-labours to making life essentials available to citizens. Plus, handling those who are not cooperating is another challenge.
Due to lockdown, revenue collections have nosedived; the Centre has limitations on spending due to budgetary constraints and keeping an eye on the fiscal deficit target.
Flights are grounded, trains are in car sheds, no taxies and buses are plying, there are bottlenecks in the supply of certain essential services, a few states are likely to defer salaries for a couple of months, private sector employees fear job losses as companies are clueless about the recovery in revenue and profits. In short, the citizenry is inconvenienced.
The International Labour Organization (ILO) has estimated approximately 25 million job losses. The United Nation’s (UN’s) trade and development agency has predicted that the slowdown in the global economy caused by the Coronavirus Outbreak is likely to cost at least US$ 1 trillion to US$ 2 trillion.
In all likelihood, the Coronavirus or COVID-19 pandemic will be followed by a financial crisis, and clearly, fears of a recessionary loom large.
So, here are five important money management lessons to cope with the gross impact of the Coronavirus pandemic on your personal finances and investments:
Respect hard-earned money and use it wisely
When your income flows smoothly every month; you don't feel any difficulty in paying EMIs, spending on essentials and enhancing your lifestyle. But times ahead look tough; therefore, pre-emptive steps must be taken to handle hard-earned money wisely, so that you save well and have an adequate surplus at the end of the month.
I suggest, engage in a prudent budgeting exercise and involve your spouse and children in it. Follow the golden words of legendary investor, Warren Buffett: "Don't save what is left after spending, but spend what is left after savings."
I believe, if you create a detailed financial plan with the help of a competent financial advisor and stick to it, living your dreams by achieving the financial goals you've envisioned is possible. When you set a goal, seek answers to questions such as…
Are the envisioned goals really the vital ones?
Is the goal realistic (ascertain the current financial health)?
How much money do I need to accomplish each goal?
What is the time to achieve the goal?
Is the goal adjustable?
In the entire goal-setting exercise, ensure your financial goals are S.M.A.R.T (Specific; Measurable; Adjustable; Realistic and Time-bound).
"A goal without a plan is only a dream," says Brian Tracy (a Canadian motivation speaker and self-development author).
Furthermore, if you have many financial goals, prioritise them into short-term (less than 3 years), medium-term (3 to 5 years), and long-term (over 5 years).
Hold a respectable Emergency Fund
The outbreak of Coronavirus has generated uncertainty. Possibly, those who have never bothered to maintain an emergency fund are feeling anxious and repenting now.
Although saving and investing money should be your top priority, putting aside some cash-and-cash equivalents for emergencies is also a must.
Ideally, hold 6 to 12 months of regular monthly expenses including EMIs on loans in a separate savings bank account and/or a Liquid Fund, as a contingency reserve. Make sure you never utilize this money for any other purposes other than for emergencies. You see, even after you resume work post-lockdown, the inflow of money may not be smooth for quite a while, because business activities have cooled off almost completely, everywhere.
Pay attention to asset-allocation
Asset allocation is not hocus-pocus as you may perceive it to be. It is, in fact, the cornerstone of investing and a strategy in itself. Asset allocation refers to distributing the investible surplus across asset classes – equity, debt, gold, (perhaps even real estate), etc. — wisely in such a way that it reduces the investment risk. Not all asset classes move in the direction at the same time always. For instance, currently when equities have been very volatile and eroded investors' wealth in the Coronavirus pandemic, gold, on the other hand, has exhibited its sheen — proved to be a store of value, a hedge amidst the uncertainty.
Hence, review your asset allocation (paying heed to your age, income & expenses, assets & liabilities, risk profile, investment objective, the financial goals being addressed, and time in hand to achieve the envisioned financial goal/s) and rebalance the portfolio, if need be. Seek the services of a certified financial guardian who can adeptly do it for you.
An intelligently crafted asset allocation may help you optimise portfolio returns, minimise portfolio risk, align investments as per your time horizon, will make timing the market irrelevant, and address liquidity needs. So, do not undermine the effectiveness of efficient asset allocation.
Optimally diversify the investment portfolio
Within every asset class as well, care should be taken to ensure investments are optimally diversified. This is one of the basic tenets for successful investing and hence advised by almost all legendary investors. Yet, many investors put most of their eggs (if not all) in the same basket-either in real estate, fixed income or equity assets among others.
Some investors go to another extreme. I know few of my acquaintances who buy into every New Fund Offer, apply for almost every IPO, hold more than 35-40 stocks plus equity mutual fund schemes, possess more than 3-4 term deposits. But this is over-diversification (due to ad hoc investment choices) and does not necessarily help. Beyond a point, it just makes the investment portfolio bulky, offers no extra benefit, does not lower the risk, and increases the burden of monitoring the portfolio.
So, while the Indian equity markets have corrected sharply (nearly 30% in the last three months), do not rush and buy anything and everything. Remember, "Too much of anything is good for nothing!" Over-diversification does not help create wealth.
Holding an optimal insurance cover is always better
With uncertainty and community transmission of COVID-19 on a rise, make sure you have adequate life and health insurance coverage. After all, who cares more about your family and dependants than you?
Your life insurance coverage should be sufficient to take care of all your outstanding liabilities, plus should add to the financial security of your family – to fulfil their life goals in your absence. Top-up if required to incorporate any material change in your financial plan. And buy only term life insurance policy. Endowment and Unit Linked Insurance Plans (ULIPs) don't make good investments and they offer you inadequate insurance cover as well.
Similarly, in my view, the importance of health insurance does not need any special mention. You see, the COVID-19 test also costs around Rs 5,000 if done in any non-government facility. Healthcare costs are going up consistently in all parts of the world. Today many of us run a risk of falling sick and not having adequate money to take care of hospitalization expenses. Thus, having optimal health insurance is equally crucial too. Check with your insurer if COVID-19 is covered under your health insurance policy.
The Coronavirus or COVID-19 pandemic is teaching all of us important money management lessons — which, some of us possibly ignored or refused to learn when everything seemed hunky-dory.
Nonetheless, no time is a bad time to improve your money management habits and get ready for the future. Possibly we might face one of the worst recessions in recent times, but if we learn how to handle hard-earned money wisely, we might be able to sail through. As it is said, ‘This too shall pass’.
Stay home, stay safe!
This article first appeared on PersonalFN here