How To Keep Your Money Safe During An Economic Slump
Six tips from financial planners to ride out a sluggish economy
Dark clouds seem to be gathering on the economic horizon. Nobody can predict whether it will lead up to a storm or if the sunshine will break through the gloom. But the one thing we can all do is prepare ourselves. Deepali Sen, a Mumbai-based financial planner, quotes Warren Buffet, arguably the world’s wisest investor, in this context: “Predicting rains doesn’t count, building arks does.” It simply means, prepare by doing what you can, to protect yourself.
“Remember two things:
a) An economic downturn is like the weather—you can’t argue with it. You have no option but to ride it out. Prepare to see yourself and your family through and,
b) This too shall pass,” Sen adds. Reader’s Digest spoke to a few trusted financial planners on how to brace up. This is what they have to say:
Track your spending
Do meticulous cash-flow planning, eliminating any unwanted expenditure. “Spend only on essentials instead of splurging on feel-good items,” Sen advises. Avoid frequent night-outs and delay the purchase of expensive items. Be aware of your expenses. “Surprisingly, most people admit that they don’t have a clue about how they spend their money,” says Harsh Roongta, a financial advisor from Mumbai. You may want to try the concept of ‘pocke-ting’—a simple way of keeping a tab on your spends. “Transfer the amount of estimated monthly expense to a separate bank account. Spend only from that bank account, whether by withdrawing cash or using a debit card,” Roongta says. If you overspend and are forced to transfer additional amounts from your ‘income’ accounts to the ‘expense’ account, it acts as a trigger to review your expenditure.
Build an emergency fund
A hefty bank balance and a liquid or ultra short-term fund, which you can easily redeem in case of an emergency, can be very comforting. “You should ideally plan for three to six months of spending as a contingency and keep the money aside in a liquid/arbitrage fund without worrying about the low returns from such an investment,” says Roongta. Top up the fund depending on the circumstances. “If you have elderly parents, make an extra provision,” says Surya Bhatia, Delhi-based personal finance expert. The contingency fund should take care of your rent, school fees, household budget, EMIs, etc., should an emergency arise. Make it a point to not use this money for any other purpose. Keep adding to this corpus while the going is good.
Life insurance protects your family against your life risks. Take out a simple term policy—your insurance cover should meet your dependents’ needs and your liabilities under unfortunate circumstances. Experts say your life cover should be 10–15 times your annual income, factoring in your age. Medical insurance is another essential cover, but many Indians ignore it because their employers provide it. Financial advisors say that you should not be dependent on your company, especially for insurance. Health insurance can act as a supplement while you are employed, but it can be a lifesaver if the insured event occurs when you are not. “Around 3–5 per cent of people under 30 could face some medical emergency or the other—accidents, surgeries or illnesses,” says Vaidyanathan Ramani, head of product and innovations, PolicyBazaar.com. “Medical insurance is also critical for those in their 40s and 50s and those about to retire, as medical expenses could increase exponentially for them,” he adds.
If you are planning for your dream house in these times, go for it, but make sure it doesn’t tie you up in debt, with hefty EMIs, for years. Some ground rules: Put aside at least 20–25 per cent as down payment, and the house costs no more than four to five times your annual household income. “This will ensure that your EMI stays within 35–40 per cent of your monthly income,” Roongta says. If you are fearing a job loss with a home loan, you may want to look at home loan protection covers that some insurance companies offer. It may take care of your EMIs for 3–6 months in a job-loss situation. You have to buy a cover for this, but, like medical insurance, it will come in handy in a crunch situation. Even if you don’t have a home loan cover, you can negotiate for a moratorium on your EMIs with your lender. You should stop using your credit card except for emergencies and well-planned expenditures. If you are in debt and not able to manage it effectively, it is best to consult a financial planner for guidance.
A devastating consequence of an economic downturn is the constant fear of losing your job. “Upskill, cross skill and keep exploring the job market. Instead of hoping for fast promotions, focus on the longevity of the job and focus on specialization,” says Shilpi Johri, a Gurugram-based financial planner. Sen agrees: “Do a better job of your current responsibility. Step outside and contribute to related areas in the workplace. Be creative and network better. Enhance a job-related skill to make yourself irreplaceable.” You may also want to network within your industry and placement consultants to be aware of job openings and prospects. “Humans by nature are born to fight and win the day, no matter how difficult the circumstances are. We can all bounce back—what is needed is the confidence,” says Ramani.
Do not panic
It is difficult to stay calm when most people are panic-stricken, selling their equities or stopping their monthly investments in mutual funds. “The most common mistake is that people sell equities when markets tank, fearing further slide. The investor then thinks they will invest when markets go further down,” says Bhatia. But that fear remains even when the markets recover. By then they have missed the bus.
If you are young and have a contingency plan, keep your monthly investments in mutual funds, so that you can reap the benefits when the markets bounce back. As for pensioners, experts suggest they should stick to safer instruments like fixed deposits, liquid funds and bonds. All one needs to do during a downturn is to evaluate their investments and liabilities and see if they need to be re-calibrated.
Remember, this too shall pass. You just need to be confident to ride out the storm.