About 5,000 respondents were involved in the nationwide survey.
Dipika Jaikishan, co-founder and chief operating officer of Basis, a content-driven financial services platform, said before the lockdown, most people ill-accounted their lifestyle expenses and spent frivolously on entertainment, consumables and lived on rolling credit.
Jaikishan knows of people who are still paying for EMIs for a vacation they took 10 months ago. “Covid-19 has forced people to take account of every little expense. In the chase for instant gratification people often go wrong in financial planning. The current scenario should be considered as a wake up call and a hard one to distinguish income and expenses that are essential from the nice-to-have purchases," she said.
Moreover, 84% respondents said they are cutting back on expenses to sail through the crisis and 90% expressed concern about their savings and financial future.
Aditya Mishra, founder and CEO, Switchme.in said there are two common mistakes people make. First, most people shy away from planning because it requires time and effort. Second, people often go beyond their means while making financial commitments. “This is truer for the middle-income group than the rich. The two things have added to their misery since covid-19 set in."
According to the report, 72% people said they would opt for a personal loan in the immediate future to tide over the crisis and meet their high-priority expenses such as servicing debt, education fees and home repairs.
However, note that taking a high-interest personal loan to service an existing loan could dent your finances further. “Prime lenders would refuse to lend in such cases. This is a perfect recipe for a debt trap," said Mishra.
Taking personal loans to service existing debt has been a never-ending loop in the Indian financial system, which has made way for the huge credit market that we see, said Jaikishan.
Loans are not advisable for non-essential expenses. “For instance, child’s education is essential, while spending on home renovation is something that can be delayed. If someone already has trouble managing debt, then taking a personal loan is a terrible idea, especially if your income and employment are unstable given the current crisis," she added. Any loan you take should be evaluated to see whether it adds value in the long term. Payday loans are a new fad you must keep away from.
As per IndiaLends, 45% of its customers who already had existing loans applied for moratorium on EMIs due to their inability to repay. Most digital lending companies offer short-term loans at high interest rates.
“Due to salary cuts and job losses, borrowers are in a mess and unable to repay loans, which is pushing them to opt for the moratorium despite the cost that comes with it. They will have to pay so much more later on. Don’t opt for the moratorium. Instead, cut down on your expenses and liquidate some investments if you have to," said Basavaraj Tonagatti, a sebi-registered investment adviser and certified financial planner.
As many as 63% of the respondents said their focus on expenses towards apparel and accessories will drop, while 40% said their expenses towards essentials will go up. Over 70% respondents said they would control their expenses towards travel, entertainment and purchase of vehicles.
To navigate through the ongoing crisis, experts said there are a few key things one must do. First, build an emergency corpus. If you have one, enhance it because nobody knows when things will improve. “Start off with saving for at least three months’ worth of expenses. Your essential expenses include expenses such as housing (EMIs or rent), utilities, education and living expenses plus a 20% cushion for surprise expenses," said Jaikishan.
Second, involve your family in the financial planning process and have conversations about money. Three, compartmentalize your expenses by creating separate buckets for wants and needs. Four, automate your savings and investments so you don’t take unnecessary breaks from investing. Five, limit your debt as much as possible. This will give you a sense of financial security and relief, especially in these uncertain times. And finally, ensure you and your family have adequate health and life insurance.
“Take time out and seriously study your finances. Seek assistance from friends who are better at financial planning if some things are difficult to understand. Take professional advice if you want. This crisis should push you to take charge of your financial life," said Mishra.