Reset, refresh, rejuvenate: How approaches to financial planning need to change post-pandemic
For Maanvi Chhabra, a finance professional, the Corona virus disaster could not have come at a worse time. Having landed a cushy job at a top-tier technology organization early this year, she was confident that she could comfortably pay off her debts in the next two years without compromising on her other goals. Building an emergency fund for rainy days was not a priority; the handsome pay ensured thoughts of unforeseen situations did not cross her mind. But before she could start paying her EMIs, Chhabra’s employer was forced to shut shop owing to mounting losses due to the lockdown.
The Covid-19 pandemic brought the world economy to a grinding halt in the first half of this year. In the past few months, governments across the world have been compelled to seal borders, cease trade and manufacturing and confine citizens inside their homes to stop the death toll from surging. Although lockdown restrictions have been eased in most countries and economic activities are being resuscitated, it will be a while before the economy can be nursed back to health. In fact, International Monetary Fund Managing Director Kristalina Georgieva and Chief Economist Gita Gopinath warned in September that a full recovery of the global economy remained unlikely until a vaccine was discovered.
The economic fallout has caused a seismic shift in the attitude towards money. Job losses, salary cuts, and shutdown in businesses have upended lives for many, the impacts of which have been devastating for those whose finances were already in fragile shape. Coupled with income uncertainties, the fear of contracting the infection and the thought of being burdened under a mountain of medical expenses has spurred people to re-evaluate their financial goals.
Talking about the impact of the pandemic on financial goals, Arjun Chhabra, a chartered accountant, says, “I don’t think my long-term goals will be impacted. The silver lining that has emerged in this crisis - there is more money in hand due to the fall in recreational expenses and I think it will be easy for me to meet my short-term goals. I have started focusing more on saving than investing because the markets are so volatile. New investments, especially high-risk ones remain out of the question. My priority in the short-term is to maintain liquidity by having enough savings.”
Nitin Rao, the CEO of InCred Wealth asserts that the current tremors in the economy have necessitated a shift in the approach to maintaining financial well-being. He says, “The markets have never had to face an unforeseen event of this nature in the past. Earlier investment cycles were usually predictable (every 3 to 4 years) and aligned with economic activity but now what with jobs and earnings at risk, short-term goals and priorities have to be aligned with those risks. Government interventions through fiscal and monetary stimulus have also in turn changed the returns expectations for all. For instance, debt instruments that were giving ~7% earlier are now giving around 3%.
Vikas Gupta, CEO at Omniscience Capital opined that the redrafting of goals primarily depends on the extent to which one’s income stream has been disrupted by the pandemic. He says, “Those whose income streams have not been disrupted, need not worry about changing their goals. Rather for them it is an opportunity because of the volatility in the stock markets and undervaluing of asset classes caused by the economic downturn. Those who have seen a significant drop in their earnings will first have to think of regenerating their income. Depending on whether they had a contingency fund or if they have had to tap into their existing investments to keep themselves afloat, they will have to re-evaluate their goals. The biggest takeaway for both these groups are that everyone should have a contingency fund that can help them pay for at least six months of basic living expenses.”
Mapping strategies with the changing situation
Given that the economy will take a while to regain its pre-pandemic health, the first step towards resetting your finances has to be maintaining a tight leash on your expenses. Gupta explains, “Irrespective of whether your income has remained unchanged, has been partially impacted or completely dwindled, you have to force yourself to go on a tight budget and keep expenses at minimum. That increases your search opportunity for new income streams for longer periods of time. If you need to tap into your investments, fixed income instruments are preferable as this minimizes the risk you would be exposed to should you play around with your equity investments.”
According to Rao, the planning for the next one year will hinge on liquidity requirements. He says, “It is important to understand your perceived cash flows to be ready for unforeseen expenses like medical costs, insurance coverage, job loss, pay cuts. Assets like gold have to be an essential part of the portfolio at least for 1 year to hedge against any uncertainties. Since valuations in the stock markets are still high, money can also be moved to debt for the short term needs. Lastly, exit strategies are critical hereon and need to be defined for all investments. Traditionally exits were aligned to markets or economy but they should now also be linked to life events, life cycle or whenever abnormal profits are made or every 3 to 5 years irrespective of the market cycle.”
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund