Managing your money through COVID-19 crisis? Keep these 11 things in mind

The ongoing coronavirus crisis has brought on complex economic challenges upon us. Incomes cuts, retrenchments, deferred loan payments, and businesses shutting down are the order of the day.

For the common man, it’s becoming increasingly challenging to sustain through the crisis while income sources are drying up. Therefore, it becomes critical to be very smart with the money and assets we currently have.

This should be foremost on your financial agenda. Cash is precious. So you must conserve what you have. In the ongoing volatility, it’s unclear when the economy will bounce back and when business would resume as usual. And therefore, exercise caution in using the cash you have.

Focus on expenses necessary for your survival, nourishment, and professional needs. Cut down discretionary expenses to the largest extent possible and focus on getting through this period.

There is no need to stash cash under your mattress. Keep your money in the bank. Go with banks with good track records and low NPAs. They’re your best bet right now. Between you and your family member such as a spouse, split your savings into two or three such banks. In case one of your banks undergoes a moratorium like Yes Bank did recently, you could access cash from your other accounts.

To raise cash, you may have to get rid of some of your investments or assets. You must liquidate your options in a thoughtful manner. Ideally, investments should be liquidated only when you’ve achieved your financial goal, to cover urgent short-term cash needs, or to save the investment from irrecoverable losses. Therefore, do not rush to liquidate everything you have.

Start with the most liquid or disposable assets. If you still need more cash, move on to liquidate long-term investments such as your PPF holdings. Be aware of the tax implications of any liquidation.

Your insurance coverage isn’t a discretionary expense. Ensure that you and your family members have sufficient health insurance and you – as the family’s breadwinner – have sufficient life insurance coverage. Keep paying your premiums on priority, because the pandemic-related risks are real and could hurt your family.

Your employer-provided insurance may not be enough. It will only last as long as you have the job. In case you’re leaving your job for any reason, you could take the employer-provided group insurance with you by paying the premium to the insurer and converting the group policy into an individual retail policy. This will help you retain the benefits that may have accrued during the policy tenure such as the waiver of waiting periods.

Top-ups are a great way of expanding your health insurance coverage. Top-ups are cheap. So let’s say if you had a base cover of Rs 5 lakh and a top-up of Rs 5 lakh, the top-up would be several times cheaper than the base plan. How does top-up work?

Let’s say you have a basic health cover of Rs 5 lakh but you underwent hospitalisation that cost you Rs 7.5 lakh. Your base cover will reimburse expenses only up to Rs 5 lakh, but the top-up coverage will cover the expenses starting from Rs 5 lakh, going up to the size of the cover.

The average traditional life insurance plan may not be enough to cover the long-term income needs of your family in case you were to have an untimely death. Let’s say you were a person in your 30s, married with one child. Your life insurance should take care of your family’s income needs for the foreseeable future.

Your primary life insurance policy should ideally be a term plan with a sum assured that’s at least 10-20 times your current annual income. This would ensure your family doesn’t face financial challenges in case of your death. Not to forget it is critical to be covered in the ongoing crisis.

The ongoing crisis will present several opportunities for you to exit old investments or enter new ones. It’s important that each such decision is tied to a clearly defined financial plan. There are plenty of opportunities now to make a quick buck right now. However, as a small investor, you should invest as per your life goals and not be swayed by short-term considerations.

For example, to save Rs 3.5 crore in 30 years, you can invest Rs. 10,000 in a monthly equity mutual fund SIP with the expectation of a return of 12 percent per annum. Goal-setting helps find the appropriate investment instrument, manage liquidity, and set expectations for optimal returns. Investments are also done for tax-saving under Section 80; however, this objective needs to be secondary.

You must invest in the right mix of asset classes appropriate for your income, age, life goals, and risk appetite. Investing via just one asset class is risky and could cause problems with returns, taxation, and liquidity. For example, those who have only saved via fixed deposits are now earning low returns due to falling interest rates in the last few quarters.

On the flip side, those who have an equity-heavy portfolio would have lost a sizeable amount of their wealth this year, and those who have invested heavily in real estate have no way to liquidate their investments due to the lockdown. Therefore, find the right mix of asset classes.

Most people should invest in equity, deposits, bonds, mutual funds, gold, and real estate. This helps them achieve their goals, maintain liquidity for emergencies, and find growth for long-term goals such as retirement.

You may have long-term investment plans that require monthly or quarterly contributions. You must, at this point, evaluate your portfolio. Given the volatility in the financial markets, it is likely some of your investments have taken a beating.

Ask yourself if the portfolio you have is an all-weather one. Does it provide you liquidity during a crisis, provide good returns for long-term growth, and continues to be a good option in a post-COVID-19 world? If not, tweak your investments to create the all-weather folio you need. That said, if you have the income stability and if you have a well-defined investment plan, continue investing – pay your SIPs or PPF contributions or however you invest.

Be careful with what you’ve borrowed. With loans and credit card dues, you have the ongoing moratorium option through which you can defer your EMIs till the end of May. However, interest will accrue in those three months and you must have a bounce-back plan to erase the additional dues.

You can do this by pre-paying the dues you had deferred. This should be done once your income stabilizes. Secondly, be very careful with credit card debt. It is an unsecured debt which is expensive. Continue to pay off your dues every month in full and do not let them accumulate.

When in need of liquidity, you have several ways to borrow funds. If you have a stable income, you could approach banks or NBFCs to apply for the loan you need as per your eligibility. For your income is unstable right now, you could consider taking a loan against securities such as property or gold. If this is also not an option, consider asking friends or family to provide you income support to help you survive this crisis.

However, with borrowings, it’s your moral, legal, and financial responsibility to make full repayment. Therefore, always be clear about how you’re going to repay your dues.

The COVID-19 crisis presents enormous financial challenges. But with a calm head, you can take informed decisions to protect your finances and come out stronger on the other side.