It’s clear a large number of people have lost or are on the verge of losing their incomes or jobs due to the ongoing Covid-19 crisis. Many who haven’t lost their jobs have been asked to take pay cuts or go on mandatory unpaid leave. This isn’t just a health emergency; it’s also a financial emergency. At this juncture, what are the steps you can take to fortify your finances? Let’s take a look at some options.
Remake Your Budget
If you have lost your job or taken a pay cut, it is critical to reimagine your budget immediately. You must realize that your old budget may no longer work under these testing new circumstances. Your lifestyle should quickly adjust to the new normal. Focus on building cash reserves. Live frugally. Lower your discretionary spends. This means you need to avoid spending money as you did before the crisis. Make a list of all the expenses and alongside them the income you expect to earn. Now, list your expenses in the order of their priority. Be ruthless – cut out any expense that isn’t critical to your life. You’ll be living on your savings for a while and the global economy will need time to rebound. If you have a contingency fund for 6-8 months, and still don’t have an income after 3-4 months, reduce your expenses further. There will always be ways to do this. For example, you may shift to a smaller home or eat more home-cooked meals.
Do Not Discontinue Health & Life Insurance
Your health and life insurance should not lapse even you have lost your job or income. This is critical because in the middle of a pandemic, the threats to your health and life are significantly higher. Keep paying your premiums on time. You may opt for a monthly payment of premium to moderate your liquidity out-go. If you had not taken a standalone health policy and were dependent on your employer-provided health insurance, you will lose coverage with your job. Therefore, always maintain your own, independently bought health insurance. If you’re in the process of exiting your job, explore the option of converting your company’s group policy into an individual retail policy by paying the premium to the insurance company. This would ensure that the benefits that had accrued on your company policy will come with you, and you will not have to start various waiting periods all over again on a newly bought policy.
A job loss can quickly push you into a debt trap. If you don’t have a contingency fund or have exhausted it after you lost the job, you may need to borrow to meet your day-to-day expenses. It’s important to avoid borrowing more than you need—especially in this scenario. You should avoid high-interest debts. Instead of taking multiple loans, take a single loan that optimises borrowing costs and your liquidity needs the best. If you have investments such as traditional insurance policy or PPF holdings, you can get a loan against securities (LAS) by pledging these investments. LAS have lower interest rates in comparison to unsecured loans such as personal loans and credit card debt. You may also explore options such as loans against FDs or loans against gold. Take a loan for a slightly longer duration than you need; it will allow you more legroom now to manage your EMIs. Avoid borrowing money through sources that charge high interest. Go to regulated lenders.
Take A Part-Time Job or Freelance For Temporary Financial Support
Till you find a suitable job, take on freelance work, or explore part-time options. Even a little financial support can help you to avoid severe financial distress if your hunt for a full-time job gets prolonged. A part-time job is also helpful for people who have got a salary cut by their employer. You may also explore ways to monetise your hobbies or expertise in your free time.
Temporarily Stop Investments
You may temporarily halt investments to avoid liquidity crunch after you lose your job. It’ll allow you to have more money in hand to meet day-to-day expenses. Once you get a job, you may restart your investments and also consider topping them up to make up for the lost time.
In the absence of a full-time job and income, avoid taking big financial decisions that can have severe repercussions later. Avoid using your credit card when you are not sure about regular income. Especially do not use a credit card to withdraw cash from an ATM because of the high interest rate and charges. It is essential to keep calm and focus on making the most out of the opportunities that lie before you by smartly using the cash you have at your disposal.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.