Keep your Money Disaster-Proof! Expert Advice on keeping your money safe in troubled times
Top tips from financial experts on how to safeguard your finances from the worst
Planning is Everything
Harsh Roongta, Columnist and Head of Fee Only Investment Advisers LLP, Mumbai
The biggest financial-planning lesson we can learn from 2020 is to have a financial plan in the first place. The dangers of not having such a plan became all too clear last year. Some were left without a contingency fund to tide over loss of income, others had unsustainable levels of debt and were compelled to default on loans for the first time in their lives.
Also, scant attention was paid to pre-determined investment allocations between equity, debt, gold, international equity and real estate. Last year began with equity markets on a high, but then it dropped 38 per cent within a span of three weeks in March and then rose again over 84 per cent to not only recoup losses but also attain greater heights.
Most unplanned financial decisions in 2020 tended to have emotional origins: Out of fear in the first few months, or greed in the later ones. As a result, individuals ended up reducing their exposure when the equity markets were low and increasing them when they were high, which can only happen when you don’t have a financial plan in place.
Disaster-proofing comes at a cost. All investments can be broken down in terms of the three basic parameters of risk, return and liquidity—these are all inversely related to each other. Short-term disaster proofing (investments whose value does not go down no matter what) comes at the cost of low returns. So a good financial plan will earmark some resources for contingencies where low returns are acceptable.
Segregate income and expense bank accounts. Control expenses with a dedicated bank account from which all payments are made which is refurbished every month via a separate, standalone transfer from the income account. This will force you to budget and put the brakes on impulse expenses as well as control how much money is going out, without having to keep detailed accounts of costs on an every day basis
Diversify and Course-correct for the Future
Dilshad Billimoria, Director and Certified Financial Planner, Dilzer Consultants
When unprecedented social, health and macroeconomic events occur, it places us in a situation without a template to rely on. This means that the financial impact and repercussions are impossible to fathom as well. In such situations, it’s hard to underestimate the value of being financially prepared and armed with an all-weather-proof portfolio to protect yourself and your family against the vagaries and uncertainties of life, job markets or even retirement plans. Staying ready for every eventuality is paramount for every individual.
After a year like 2020, investors are now having critical conversations about portfolio strategies that are resilient, sustainable and with reasonable expectation of returns. The objective? Continuity of income flow, jobs, salaries and portfolios that ensure long-term wealth creation.
With this in mind, investment strategies that cover ESG themes (environmental, social and governance) have gained importance in light of corporate ethics and management. Moreover, understanding the importance of asset allocation and diversification has played a very big role in protecting one’s corpus against uncertainties and irrational behaviour, both one’s own and that of the markets.
Along with more diversification, tracking and adjusting your portfolio based on shifting landscapes is also key. Monitoring a continuous downfall of fund-manager performance, profit booking when markets have reached a peak, dropping investments that do not follow its original mandate and consistently correcting your approach to maintain safe strategies as you get closer to the realization of your goals are all important measures to adopt while your finances grow and mature.
Consider growth cautiously with an eye on longevity, not get-rich-quick schemes. Create a business plan that is conservative and resilient in the face of changing times to safeguard business growth. Focus on preservation and profit earnings to counter variations in business cycles.
Save and Spend Wisely
Surya Bhatia, Managing Partner at Asset Managers, New Delhi
The 2020 pandemic and the resulting lockdown caught people completely unaware, particularly those not in the habit of maintaining smart money-management principles. As unemployment hit, thousands of laid-off employees had to dig into their reserves to manage expenses. Keeping at least six month’s worth of expenses spread out in easily accessible investment schemes, namely bank deposits, debt funds, liquid, or ultra-short-term options. When emergencies strike, this can be a lifeline as 2020 made clear.
The second lesson the pandemic year teaches us is careful cash-flow planning. Overspending and taking substantial loans too large to easily repay meant that finances live on the edge. With the economy hit by freezes, even employees who were retained suffered pay cuts or months-long relinquishment of salaries.
While a moratorium was issued by the RBI, debts continued to accumulate. So planning one’s cash flow to ensure enough resources for the rainiest of days, or even months, is critical. If nothing else, 2020 taught us to spend wisely.
Lastly, invest in a regular and disciplined way and practice monthly savings to install a systematic approach which will help you build as well as safeguard your corpus over time.
Stick to your asset allocation. Instead of trying to time the markets, rebalance your portfolio once every year. While it is easier said than done, this is a prudent measure that can be done if one’s allocations are done according to the investor’s overall risk profile. It will also ensure that the panic button is not pressed in tough times!
Knowledge is power
Deepali Sen, Founder–Partner of Srujan Financial Services LLP, Mumbai.
From a sudden loss of income or deferred bonuses to joining delays at a new company, business shrinkage for entrepreneurs or health scares—curveball events like these can have a devastating impact on our best-laid plans. Since none of us have a crystal ball to see the future, you have to stay ready for them through careful planning and constant calibration to avoid being forced to ask for money from friends or family, take on personal loans from employers and financial institutions or derail medium- or long-term investment goals, such as your retirement or paying for your children’s higher education.
Money management requires firing on multiple barrels. Maintain a healthy emergency fund—money not for impulse shopping or monthly cost overruns, but strictly for bolt-from-the-blue crises. If you must dig in to these reserves for any reason, furnish it back to the same level as soon as possible.
Invest with clear goals and frank awareness of your needs. With investments, risk and returns are two sides of the same coin and go hand in hand. Risk is unavoidable if your money is to be nurtured effectively. For that, we first need to ensure that our wealth grows a couple of notches more than what inflation and taxes erode off it. We also need to stay informed to minimize your gamble and maximize returns. So invest only after acquiring a clear understanding of how it all works.
Lastly, the need to pay off loans and adopt appropriate medical covers for yourself and your dependents cannot be stressed enough. Medical emergencies destabilize one’s financial health so set up the right measures to protect yourself.
Stay adequately insured through a term plan that meets the financial needs of your dependents in case of untimely death. Expedite loan repayments. Invest by stretching your savings potential every month. Money tends to accumulate at the speed of a turtle and be spent at the speed of a rabbit!