50 days of solitude

As India completes a long period of lockdown because of Covid-19, The Federal revisits the biggest story of our times and tries to make sense of the surreal events that have unfolded around us since March. We look at how life has unfolded in a pandemic, what it has told us about ourselves, our country, society, religion and government, and what can we expect from a post-Covid world, if it exists. Today, we look at how the crisis would help us understand our relation with money, and its importance.

Part 6

What Covid-19 tells us: It is all about money, honey

Uploaded 18 May, 2020

It’s critical you evaluate your repayment capacity carefully before signing up for any financing facility as an unaffordable loan could destroy your finances. Photo: iStock

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Nitin Mathur

Money, money, money, must be funny in a rich man’s world, sang ABBA. A few years later Jerry Maguire famously said, show me the money.

Well, we are in the middle of a pandemic and have realised that our survival depends on just two things—our health, and our financial health. These 50 days have taught us many things about money, its value, its use, and, of course, how best to save it. Let us revisit some of the lessons.

IAlways have an adequate emergency fund in place

An emergency fund is a great way to meet our day-to-day liquidity requirements in the absence of a regular income or while tackling any other type of financial emergency. It should ideally be worth 6 to 12 months of your expenses including EMIs on loans parked high-interest savings account, a fixed deposit or even a liquid mutual fund for unforeseen events.

IICreating multiple revenue streams is essential

Creating multiple income streams allows a person to diversify the various cash flow sources that are coming in. In the event one dries up, then there are other sources of income to lessen the loss. For instance,having other sources of income during a recession can help you deal with a potential job loss much easier than being caught off guard. Even if your other sources of cash can't cover all of your monthly expenses, it can still give you time to figure things out.

IIIFinancial Planning is something everyone needs

Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained. It helps a person in understanding their current situation and the steps to be taken to reach their financial goals.

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IVNever underestimate cash on hand

You probably aren’t going to able to break down and withdraw your investments as soon as you need it. And it well is very much possible that your regular flow of income just stops almost immediately if you don’t have any cash set aside you will face some problems.

VBetting it all on the equities is not a good strategy

Don’t bet it all on equities if your goals are short term. Equity is an asset class which not only has usual daily volatility but also major periodic crashes. If all your investments are tied up in equities and you need to make withdrawals from your investments as you are short on money during a crisis, it’s most likely possible that almost 30-40% of your initial investments have been wiped out as anyway the market conditions are bad.

VIDiversification is the key in your portfolio

Diversification reduces risk by investing in investments that span different financial instruments, industries, and other categories. One should always look into different investment avenues like gold, bonds, debt funds, fixed deposits, etc and not just focus on one particular type of investments.

VIIDon’t invest blindly into anything

The major misconception individuals have is that all investment vehicles are safe and investing generates returns in bounds and leaps. Evaluating schemes, products and funds before investing in them is very crucial. One should be clear about their risk appetite and objective of the investment and make an informed decision.

IXPatience is the mantra

Patience is the mantra for letting investments grow. If you know your money is in safe investment products and there isn’t any shady news on the same. Your best bet is to just weigh it out, once the crisis is over and the economy starts running again, the returns will be positive again.

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XNever take a loan you can’t repay

It’s critical you evaluate your repayment capacity carefully before signing up for any financing facility as an unaffordable loan could destroy your finances. Especially when a loss of income could be on the cards, repaying an unaffordable loan could get even more challenging despite some short-term relief from the government.

XIIt’s never safe to assume that future income is guaranteed

While making future financial plans do not consider the current income and expect growth pattern will continue without any disruption. Because disruptions always happen and result in shut businesses and job losses.

XIIYour lifestyle isn’t your cost of living

"Many expenses are discretionary. But people always insist it is essential. During this crisis, people have seen that they can live a basic life without the trappings and frills. They will most likely understand the fact that many of the so-called essential expenses can be done away with for the most part," says sadgopan. The last 50 days has shown that life can be managed with just essential items.

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XIIILess can be more

It doesn’t matter if you save INR 100 a month or INR 10,000 a month, a consistent stream of savings will help you a lot in the long run and provide you with a cushion in the times of crisis.The past 50 days has compelled people to manage their lives with the bare minimum and made them aware of the areas of unnecessary spending and an opportunity to save by cutting down those expenses.

XIVAnd lastly, you can’t put a rigid timeline to anything

When it comes to goal setting a lot of people have extremely tight timelines which isn’t ideal, one should leave some buffer time to account for delays due to economic slowdown and other unpredictable situations. Setting rigid timelines and not being able to fulfil those can be detrimental to not only a person’s confidence but also mental health.

The author is CEO of Tavaga Advisory Services, an online platform for investing in money markets

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Part 6