Rebuild the savings you lost to covid-194 min read . Updated: 10 Oct 2020, 10:37 AM IST
A disciplined strategy will help you meet important money goals
Kolkata-based R. Pathak, 43, who works in the hospitality sector, saw a huge pay cut after the covid-19 crisis broke out, and was forced to stop new investments and even dip into existing ones. “My children’s fees alone make up a large chunk of my outgo. I am also paying off a home loan," he said. Since neither the fees nor the home loan equated monthly instalments (EMIs) could wait, Pathak had to use his emergency fund parked in bank fixed deposits, stop his systematic investment plans (SIPs) and redeem his investments in two mutual funds.
Like Pathak, several people were forced to dip into their savings to pay bills and EMIs. The Union labour ministry informed Lok Sabha last month that employees had withdrawn a huge ₹39,400 crore from their Employees’ Provident Fund (EPF) accounts between 25 March and 31 August. “Life insurance, postal savings and mutual funds have also seen withdrawals. Though difficult to quantify, even gold to an extent has been liquidated but at all-time high prices," said Santosh Joseph, chief executive officer and co-founder, Germinate Solutions LLP.
An effective strategy can help you stick to your important financial goals and help you make up for what you’ve lost.
save before spending
A lot of people have opted to make lifestyle changes to meet expenses and continue their investments instead of liquidating their assets. “The ideal option is to cut expenses to such an extent that there is no dent in the current investments. But don’t stop EMI payments," said Deepali Sen, founder partner of Srujan Financial Advisers LLP.
In short, ensure that you make lifestyle changes first before tinkering with your investments, as far as possible.
“Most of my clients have taken a pay cut in the range of 15 % to 25%. However, since monthly expenses too have gone down by around 20% in most cases and clients realize the importance of savings, they have managed to stay afloat by tightening their belts and deferring non-essential expenses," said Sen.
Deal with debt
It’s also important to deal with your liabilities and not let any new debt creep in.
Some people have moved back to their home towns looking for lower living costs or to avoid debt. Shweta Jain, founder and CEO, Investography, a financial planning firm, relates the experience of a professional in her 30s. She moved back from Bengaluru to Delhi to live with her parents, as she lost her job and wasn’t sure when she would find another.
What about those already in debt? “The ideal approach will be to cut expenses, save more incrementally and maybe even refinance some high-cost loans or just close them," said Joseph. You may choose to liquidate your employee stock options (Esops), borrow money from parents, take loans on existing assets and look for ways to reduce rent.
On the face of it, settling liabilities using your assets may seem like you are depleting your savings, it will help your net-worth in the long term. “I suggested one of my clients to part withdraw his EPF to prepay the hefty home loan, as both he and his wife were fearing job loss. I also stopped their SIPs for their retirement, which is 10 years away, so that they could increase their EMI. This will ensure that their home loan tenure is reduced," said Sen.
Consider factors like costs and taxation before you liquidate an asset or make a partial withdrawal. Read more about the order in which it makes sense to liquidate your assets here: bit.ly/302t4g5.
Defer or scale goals
Pathak is finding it difficult to accept how much he has regressed on his path to saving and investing for his future goals. “Liquidating the funds helped me tide over the worst of the financial crunch, but now I am worried that the goals I was saving for will suffer," he said.
But deferring or scaling down some of the goals to realistic levels may actually help you stick with your overall plan. “Wherever possible, defer your goals by eight to 12 months. For example, delay retiring (for those considering early retirement), sabbatical, higher studies, starting a family or starting an enterprise, and reduce marriage expenses," said Sen.
People are indeed scaling down goals like early retirement. Data from BankBazaar’s recent report, titled BankBazaar Savings Quotient, showed that for those between the ages of 35 and 45, the expected retirement age went up from 57.4 last year years to 58 years.
“Maybe consider striking off some feel-good goals like a foreign vacation," added Sen. Investing higher sums at a later stage may be another option.
Have a plan
Even if you feel like you are starting over, make sure you have a plan in place. “Those making a fresh start should follow this sequence: first, build emergency fund equal to for 8-10 months of expenses; second, have a term plan for at least 10-12 times your annual income if you have dependants; third have adequate medical cover for yourself and dependants; fourth, borrow as little as possible with the aim of paying off at the earliest; finally, budget your monthly expenses based on goals," said Sen.
While it can be disheartening to see your hard-earned saving getting depleted by a crisis you have no control over, you need to look and plan ahead. Your circumstances may vary based on your stage of life and how well you have planned your finances, but no matter where you stand, you must rebuild your savings.