Salaried reassess money goals as covid-19 widens liquidity gap

There are no two ways about it—the covid-19 pandemic has left most Indian households in distress. Six months after the nationwide lockdown was implemented to curb the spread of the virus, households are reeling under the consequences of the economy slowing by way of layoffs, pay cuts or salary deferment. But the pandemic has pushed individuals with a long-term financial plan to either eliminate or re-evaluate some of their money goals.

According to ArthaYantra, a financial wellness and wealth management platform for working professionals, India’s average financial health score pre-covid was 354 on 1,000. A score below 300 means the financial health is critical, 300-450 is below average, 450-600 is average, above 600 is good and anything over 800 is very good.

The pandemic has only worsened the score. “Financial health level, post covid, has dropped from the average 354 to 284 on 1,000, pushing the salaried to critical stage,” said Nitin Vyakaranam, founder and CEO, ArthaYantra, which shared a comparison between pre- and post-covid data exclusively with Mint. The firm determines the score by taking into account over 70 parameters such as income, expenses, cash flows, liquidity, loans, insurance, goals and investment.

LIQUIDITY CONCERNS

Households are dealing with uncertainty around cash flows in the short to medium term. Further, with the virus still going strong, consumer confidence is low. Madan Sabnavis, chief economist, CARE Ratings, said this full year will be a washout in terms of liquidity access for households.

If given a pink slip, 71% of salaried individuals cannot manage their expenses beyond six months, according to data from ArthaYantra. This is largely because of lack of liquidity and the absence of an emergency fund, said Vyakaranam. “Post covid, the situation has worsened and this will continue to worsen as we expect more pink slips. Liquidity levels of individuals with annual income up to ₹15 lakh has dropped by 60-70% on average with some segments already running out of money to meet basic expenses. Also, debt as a percentage of spending has seen a significant increase,” he added.

The ratio between cash (or cash equivalents) to monthly expenses should be in the range of 3-6. So if monthly expenses are ₹30,000 and cash plus cash-like assets are worth ₹1 lakh, then the ratio is 3.3. ArthaYantra calls this the liquidity ratio.

Post-covid, for an individual with income up to ₹5 lakh, liquidity ratio is down to -0.13 from 4.19 (age 21-28) in case of a job loss or other financial emergencies. For individuals with income of ₹5 lakh-15 lakh, the liquidity ratio is down to 2.11 from 4.99 (age 29-36), and for those with income of ₹15 lakh-25 lakh, it has dropped to 3.90 from 6.4 (age 37-44).

Shweta Jain, CEO and founder, Investography, a financial planning firm, said liquidity is impacted to a large extent but it does help that expenses have been cut down in the last few months. “It is now for us to see how spending patterns evolve as the economy opens up. There have been households where one partner has had a job loss and another has a cut in income, those have suffered the most. They’ve had to cut down not just on expenses, but also some aspirations for the future.”

IMPACT ON GOALS

According to ArthaYantra, around 60% of salaried individuals have ruled out travel as a goal they want to plan for. About 50-55% of individuals have decided to delay buying a car by an average of 24-36 months. Further, 45% will delay buying a home by 36-60 months.

“Some of the factors that are influencing these decisions include financial uncertainty, lack of liquidity, lower rentals, long-term movement of people from metros to smaller cities, and high cost of buying real estate,” said Vyakaranam.

Most of the financial planners we spoke to said there has been a detailed review of previously set financial goals. Renu Maheshwari, CEO and principal adviser, Finzscholarz Wealth Managers, said they gave priority to the current needs of a client who owns small businesses over his long-term goal of attaining financial freedom. “Although he had cash to invest during April, we suggested securing liquidity for the coming year, when cash break-even could become difficult. This action will result in delaying his goal of financial freedom by a couple of years,” said Maheshwari.

One of Jain’s clients has decided not to send children abroad for education which was planned for in the past few years. “Another client moved back to her home town after she lost her job in a senior role. She will now live with her parents to avoid dipping into her savings,” said Jain.

Planners said it is usually the long-term goals that get compromised during such events and it could be with a hope that the future will present opportunities to make up for the current shortfall. “We always recommend letting go of discretionary goals such as a vacation abroad and buying expensive cars. We recommend not compromising on goals such as retirement,” said Maheshwari.

countering THE HIT

While it may look difficult, households must take steps to ensure they have adequate liquidity in the short term. The key to remain in control is to cut down on expenses and stick to a budget.

Lovaii Navlakhi, managing director and CEO, International Money Matters Pvt. Ltd, a financial planning firm, said this will allow you to focus on gradually bringing back income to the previous levels or higher. Monetizing on your skills or hobbies until the job market opens up with more opportunities is an option one could consider. “In an upmarket community of one of my clients in the US—and I am sure this is true in India as well—many of those who did not work for a living are monetizing their capabilities in the areas of home cuisine which is being lapped up by friends tired of managing households continuously without the break of dining out or travel,” said Navlakhi.

Covid-19 has helped people realize the importance of preparing for the worst and this is something you must adhere to when it comes to planning your finances. If you’ve eaten into your emergency corpus already, try and replenish it at the earliest to ensure that you’re prepared for more rainy days.

disha.s@livemint.com