Back4.5% growth can’t sustain 9% growth pegged lifestyles
The job losses for the urban Indian mass affluent are hurting even more because our lifestyle costs.
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The looming clouds of disaster are now overhead as economic data quarter after quarter show how serious the downturn is and expose the government lies, doublespeak and market talk-up over the last three years. As veteran employees, we learn to decode the signals of a slowdown fairly quickly. At the beginning of an economic slowdown, the first few cost cuts are around training, offsite events, office parties and travel budgets. You know the slowdown is deepening when fresh hiring is frozen and then travel. You know that things are getting really bad when even replacement hiring gets hit. Other signals that the company you work for is struggling are delayed salaries, restrictions on tiny expenses such as beverages and publications. And then when the news is all about shutting down of a business unit and of mass firings to reduce employee costs—you know that the economy is in a hole that will take a long time to dig out of. The macro problem of a slowdown comes home into individual households when jobs are lost. The job losses for the urban Indian mass affluent are hurting even more because our lifestyle costs have got pegged to an economy that was growing at 9%.
While this is of little help to those already laid off, for others there are some basic financial hygiene steps that everybody needs to take. I can’t emphasize enough the importance of having an emergency fund. We tend to treat an emergency fund a little loosely—in our heads it becomes the money that lies around in the savings account “for an emergency". Neither is the emergency defined nor is the amount to be kept for it. A rough rule of thumb says that an emergency fund has at least six months of living plus all EMI spending in it if you are a single-income family and three months for double-income households. This is the first corpus you build before you buy one rupee of an investment product. You need to hold this money in a near liquid form and the product choices will depend on your comfort and ability to use different product types. For those who are not familiar with mutual funds, stay with the trusted fixed deposit (FD). Split the targeted emergency fund into smaller parts and use a one-, three- and five-year FDs to create emergency fund pools. A 10 lakh emergency fund, for instance, will see 3 lakh in a one-year FD, 3 lakh in a three-year FD and 4 lakh in a five-year FD. This laddering of the money gives you cash in periodic bits and allows for a higher return in case you don’t end up needing the entire six months’ money. Also, the cost of breaking an FD early is small—you lose about one percentage point in return. Debt funds offer another vehicle to target an emergency fund. A split between liquid, ultra short-term and short-term bond funds works well. A liquid fund is money that you may need within the next three months. An ultra short-term fund works as a replacement for a one-year FD and a short-term debt fund is money invested for upto two years. Don’t wait to create this pool. Start on it immediately.
And while we’re at this conversation, there are these three other things you need to remember to navigate tough times. One, recognize that our lifestyles have got pegged to an economy that was growing at 9%. Unhappily an economy growing at half that rate will not sustain those costs anymore. (The macro part of my brain is protesting—the cutbacks in consumer spending will only make the problem worse!). Two, reduce your debt to levels that don’t kill you if you lose your job. Think about prepaying a heavy home loan. Think about not taking EMI-linked plans to finance gadgets, holidays and other stuff. And three, you need to have a back-up plan to your job. This is a time of super fast change. Companies that did not exist five years ago are global giants and there are giants that were born and died all within the space of a decade. Just because you trained in and worked for a particular sector does not mean that you will stay there your entire working life. It’s good to think about yourself as an entrepreneur who, instead of making stuff, rents out his labour. Which means a lifetime of learning and doing rather than settling into the safe rut of middle class comfort.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com
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