The message is clear: we must change our money habits and question preset notions of financial security. Many of us are set in our ways of dealing with money matters. Just as we revisit other facets of life post covid, it is time to refashion some of our saving, borrowing and investing habits. Not sure where to start? After speaking to financial advisers, we have zeroed in on a few areas that demand your immediate attention. Not all of these tweaks can be done overnight. Some habits may have to be phased out gradually. A new approach may take time to take shape. But over time, these tweaks should put you in a better position to deal with financial shocks.
Always have ample liquidity
The pandemic has brought into focus the importance of having enough liquidity at all times. Simply having huge savings doesn’t count for anything if these are illiquid. Your prized real estate assets won’t come to your aid when in need of immediate cash. The lakhs stashed away in instruments with a lock-in will also be out of reach. Forget about getting your money out of traditional insurance plans either. It’s not at all wrong to have illiquid assets. But it is vital to have sizeable chunk of savings in assets that you can sell quickly on a rainy day. Vivek Rege, Founder & CEO, VR Wealth Advisors, says, “Investing all savings without providing for liquidity comfort will pose a serious problem when you desperately need the money.”
You can ensure liquidity by setting up an emergency fund that is big enough to take care of 3-6 months’ expenses. Some experts say a nominal buffer of 3-6 months’ expenses may no longer be adequate. Prableen Bajpai, Founder and Managing Partner, FinFix Research & Analytics, asserts, “Emergency savings need a drastic overhaul in the face of prolonged threat to jobs and incomes. At least one year’s expenses should be kept aside for this.”
Where should you invest your emergency corpus?
Assumed expenses Rs 50,000 a month
One year expenses will work out to Rs 6 lakh. Divide this into three time horizon buckets as follows
Note: When providing for monthly expenses, cover all basic living expenses as well as any EMIs. SIP outflows may be excluded.
The requirement may be even higher for those engaged in more vulnerable occupations with limited alternative work or for households where both partners work in the same industry. It is also important to review your liquidity position periodically. This buffer may be in the form of bank deposits or even open-ended mutual funds, apart from idle bank balance. Having enough liquidity comes at the expense of lower returns, but it’s a price worth paying.
Don’t borrow future income
The ‘buy now, pay later’ philosophy has got a rude jolt. Amid salary cuts and business disruptions, many individuals and households who borrowed heavily are stuck in a quagmire. Some are unable to repay the loans while others are left with little savings after servicing hefty EMIs. For many, the issue is of borrowing more than they can afford. When taking on a big loan, most borrowers make rosy assumptions about future income. Even if the loan or outlay seems out of comfort zone now, many surmise that a rising income trajectory will make it more affordable down the line.
This logic often dictates the spending itself: Why not shell out a few lakhs extra for the roomier 3BHK even when a compact 2BHK would suffice? In lieu of the hatchback, what is a few thousand more rupees in monthly EMI for that swanky new sedan? It is this premise of borrowing from future anticipated income that can spell disaster. This thinking has to be revisited as shocks can disrupt the best laid plans. Rege cautions, “Don’t fool yourself with false optimism regarding the future. It often drives lifestyle changes that can be painful to reverse later.”
Any loan decision must be taken on the basis of prevailing circumstances. The thumb rule is that all EMIs should not add up to more than 50% of your current income. Also, don’t take a loan just because it is available. If your EMIs gobble up too much of your income, other critical financial goals, like saving for retirement or your kids’ education, might get scuppered.
Stress test your debt burden
Before taking a hefty loan, consider the undesirable scenarios that may play out in future.
Inflation rate assumed at 5%, normal income growth at 5%
A buffer beyond health plans
Amid the spate of hospitalizations, thousands of sufferers have found out the hard way the inadequacy of their mediclaim plan coverage. Insurers are refusing to pay higher than prescribed rates charged by private hospitals or cover the cost of overhead consumables like PPE kits and sanitization equipment—accounting for a chunk of covid hospital bills. With several instances of claims being denied or settled only for partial amount, policyholders have had to pay for expenses themselves. An analysis of official data shows that insured are shelling nearly 40% of the treatment costs from their own pocket. Many have even been denied cashless settlement—policyholders are being told to pay the full amount and file the reimbursement later.
Clearly, your mediclaim cover may not fully cushion the blow from medical exigencies. This is a reality not merely restricted to the abnormal circumstances of the ongoing pandemic. With multiple exclusions and clauses like co-pay or sub-limits within health plans, policyholders are always at the mercy of the policy fine print. Think a Rs 25 lakh or higher policy will cover all expenses? Even those with large-sized covers are never fully covered for all expenses. Policyholders must henceforth put in place extra financial buffer even if covered by a health plan, financial planners say. “It is a good idea to have extra cushion in place for medical exigencies that goes beyond what is covered under your health plan,” contends Bajpai.
Write will, update nominees
The pandemic has claimed victims across age and class divides. Many of these were breadwinners who left behind assets, but no written wills or nominations. Bereaved families have to fend for themselves without immediate access to their own household assets. There is a clear lesson in this. Preparing a will cannot be a task kept aside for later years. If you have dependents, execute a will or at the very least, make sure to have nominations in favour of your loved ones at the earliest. Save them the drudgery of running from pillar to post claiming their rightful assets in case of your untimely demise.
Not having sufficient assets yet should not stop you either. “You can still create a will covering whatever assets you own today and update it over the years as and when you accumulate more,” exhorts Tarun Birani, Founder and Director, TBNG Capital Advisors. This follow-up is critical. Make sure to update the will at regular intervals. This may be through a codicil for minor alterations or executing a fresh Will for bigger modifications. Besides, at all times, keep a trusted, responsible family member informed about the existence and location of all important financial documents.
Cover big-ticket liabilities
With the death of the breadwinner, many families now face the burden of repaying outstanding loans. This has exposed another gap in people’s borrowing habits. When opting for large ticket size loans, it is not enough to have a roadmap to repay. Buy a term insurance cover equal to the loan amount to protect your family from shouldering the burden of repayment in case of your untimely demise. If you are taking a large home loan, opt for a term plan linked to the home loan or a separate cover. This has to be over and above any existing term plan that covers your family’s future income needs, insists Bajpai. It will ensure proceeds from the existing policy don’t go towards paying off the loan, leaving your family exposed.
The worst scenario is when the family occupies the house mortgaged in the name of the deceased, but not covered under a term plan. “Covering your liabilities through a term plan will ensure the asset can come into the possession of surviving beneficiary easily after outstanding balance is paid,” asserts Rege. In case of a term cover bundled with the loan, the coverage reduces in direct proportion to the outstanding loan. The one-time premium amount is embedded in the EMI. However, it is advisable to buy a separate term plan. The premium for a linked term plan is usually higher, even if not visible upfront. Further, you cannot hike the cover amount under a linked term plan in case you opt for a top-up loan. You will have that flexibility with a separate term plan.
Go beyond domestic market
Indian investors have traditionally piggybacked entirely on the India growth story for wealth creation. While this has served investors well enough, the pandemic and its economic fallout should force a rethink of domestic bias. Experts reckon it is high time Indian investors look beyond the country’s borders for investing ideas. International equities can no longer be treated as an exotic indulgence but an integral part of one’s asset allocation, feel financial planners.
The inherent strength of developed markets has been amply evident in the post-covid global environment. Economies like the US, UK, Germany, among others have shown fast recovery amid swift healthcare response and hefty economic relief packages. Viraj Nanda, CEO, Globalise India, argues, “More than any other point of time, covid has demonstrated how countries respond differently to adversities. This feeds into the respective markets. Geographical diversification is therefore a must to mitigate country-specific shocks.” Beyond this, other countries have specific strengths and expertise that are unique to each. This allows for investing opportunities that simply do not exist in Indian companies.
However, this allocation to foreign equities cannot be merely cosmetic. Investors must participate more meaningfully in foreign equities. For it to truly afford required diversification and contribute to wealth creation you need to give it enough heft in your portfolio. Any allocation less than 10% of your total corpus will not materially make any difference, even when it is the best performer in your basket.
Experts maintain that 15-20% allocation will provide enough diversification. But this can’t happen overnight. “Start with small steps, build enough comfort and familiarity with foreign markets and gradually work towards that allocation,” says Nanda. This may be through equity funds investing across global equities or dedicated to US markets or even individual bets in foreign stocks.
