5 Steps to Minimise the Impact of COVID 19 Lockdown on Your Finances
As India enters the phase-II of lockdown and continues its battle against Coronavirus pandemic, the deadlock of economic activity worries the masses. While the phase 1 saw people hoarding essential supplies, relishing abundance of family time, adjusting into newly found work-life rules, and expressing solidarity in clapping & beating thalis, and lighting candles & expressing gratitude towards health professionals & more, the constant financial stagnation & disruptions have firmly manifested a bigger question for all: How do I manage my finances during the lockdown & for how long?
Prime Minister Narendra Modi on Tuesday has extended the COVID 19 lockdown till May 3, 2020, and hinted at the stricter implication of social distancing for the next 7 days (till April 20, 2020). Thus staying at home is not an option but a regulation.
The PM outlines a 7 point to-do-list to surviving the lockdown: protect elders, use DIY masks, boost immunity with home remedies, install Arogya Setu app, provide food to poor, retain jobs of your workers & continue extending gratitude for health workers.
But how do I survive the lockdown is the multi-billion question today for the cash strapped individuals, including the farmers, the daily workers, the small businessmen, the middle-class households & the working class, which fears the layoff, the salary cut and an unprecedented delay in payments. With the beginning of lockdown phase 2, the battle with COVID 19 has turned into a ceaseless fight to put up firm without having enough.
How to take care of your finances during a lockdown?
In the face of fear for the unknown, the medical health emergency has become a financial catastrophe across the world. The three-month repayment Moratorium is not going to appease your financial worries. You need an action plan to survive the lockdown and post lockdown economic slowdown.
Let’s chart out a step-by-step guide on how to cope with the financial disruptions caused by Coronavirus pandemic in your life.
1. Why Cash is a King in your fight against Covid19 Lockdown? Revisit your budget.
In the times of lockdown, cash is a king, and the digital transaction is a queen. You need substantial Cash in hand, Credit Card limit & Savings Account balance to survive the lockdown.
However, it is easier said than done. With multiple EMIs, utility & credit bills to go each month, it is not as easy to save when you are literally making lesser every month.
Thus the first step to managing your cashflows during & after lockdown is to revisit your budget.
To truly survive the financial emergencies, each household should be able to save, spend & invest each month.
Divide your expenses into necessities & desires. To save more during this difficult time, put “desires” on the backseat. Make a journal & note down where the money is going out.
Divide your payments into periodic & one-time. Now assess the importance of each expense. Try to cut down as many on the list as possible. You can even opt to delay some of the nonessential expenses like learning guitar or shopping branded stuff every time. This financial discipline needs to continue for at least six months after the lockdown.
Think of additional ways to make more money. All of us have some skills which can be monetised. If you have one, gradually convert it into a passive source of income. It is always fruitful to have multiple sources of income. For example: you can start a YouTube channel, coach online, or write an ebook.
Divide investments into 3 categories: Emergency Fund (Liquid fund), Short to Mid-Term Fund (investments for 3-5 years), and Long term Fund (investments for 5 to 10 years).
However, a lot of people do not pay heed to the Emergency Fund.
If you too are falling short of liquid fund, here are some instant cash loan options available for salaried and self-employed individuals. Some of these are announced by lenders, especially for meeting cash woes during pandemic spread.
1. Bank of Baroda COVID Loan: The Bank of Baroda has offered a special Covid19 Personal Loan for up to Rs 5 Lakhs to its existing retail loan customers with CIBIL score of 650 or above. The loan is offered at a concessional rate of interest starting at 10.25 % p.a for a maximum of 5 years.
2. Emergency loan for small businesses: Apart from a moratorium on working capital credit lines, PSU banks like SBI, UBI & Indian Bank have also announced Small Business Emergency Loans with EMI holiday for MSMEs. In case you need additional funds to sail through this time, you can opt for these emergency loans at 7.25 to 8.25 % p.a.
3. Loan against PPF: If you already have a high FOIR to serve, you can consider Applying for a Loan Against PPF. After 3 years of opening the account, you can raise a loan up till the 6th year. The loan raised is proportional to your deposits and raises only 1% of interest. It is a good option as a bridge gap arrangement.
4. Loan against FD: If you do not want to liquidate your investments you can always opt to borrow against your assets. A Loan Against Fixed Deposit is a secured loan and entails 75 to 90% of the deposit value at a fairly low rate of up to 2%.
5. Home Loan Overdraft: Another flexible way of drawing cash is by using a preapproved Home Loan Overdraft Facility. The Home Loan OD facility is offered at flexible repayment terms and entails the same rate of interest as of your Mortgage. You can access the facility through internet banking or contacting your RM.
6. Credit Card: Despite increasing financial literacy, a great number of people in India still do not tap the available benefits on the Credit Card. In case you have just cleared the last month’s card statement, you can swipe your card for urgent expenses and make use of 50 days of the free period. With card spends you can save more & protect cash in hand.
2: Is your emergency fund enough for 2 month lockdown?
The financial crunch we are facing today is something unheard of before. Herein your emergency fund is going to help you stay afloat. You do not need to indulge in panic selling or liquidating your fixed deposits without a thought. An emergency fund ideally should comprise of 4 to 6 months of your monthly expenses parked in Savings Account, Bank Deposits, Post Office Saving Schemes, Debt Funds, etc. You can use these according to available cash flows. However, make sure you do not use more than what is required and conduct a cost-benefit analysis before liquidating an investment instrument to pay out your Credit Card bill or a Home Loan EMI.
3: Are you adequately insured to protect your family?
Another important step to secure your family’s future is by buying Health Insurance for all family members and Term Insurance Plan for working members. In case you haven’t bought the insurance policies for you and your family, you must buy them now. In the wake of the current cash crunch, you can opt to make the monthly premium payment. An adequate insurance plan can help get peaceful sleep in the night despite challenges.
4: Are your investments safe? Review portfolio
With the stock market plummeting consistently, it is natural to feel the urge to exit the market now. However, MyMoneyMantra recommends staying away from making any decisions in haste.
In the face of extreme market volatility, you must exercise caution and rebalance your portfolio according to the asset allocation. That is, if you were investing in MFs through SIP for long term goal of your child’s education, you should continue the contribution. However, if there is an inevitable cash crunch, pause the SIPs, but hold the fund. You still have an opportunity to gain in the long run.
Continuing investments in the current market scenario can help you average down the holding cost. Markets are always volatile, and thus it is always recommended to opt for debt funds for short term goals. One should always consider shifting to debt funds 2-3 years ahead of the goal.
In case your goals are near, you should rebalance your portfolio gradually. You should never book all losses. Consider liquidating a part of gold funds to meet the gap, if any.
5: How to deal with outstanding loan EMI & Credit Card balance?
Opting for a bank moratorium is one way of resting your bank repayments. However, you should not opt for the same without assessing the cost of the decision. Instead, you can put your emergency fund to a good use here. You can liquidate some part of FDs or gold funds to repay your cost EMIs & bills. The idea is to replace the low earning investments to pay high-cost loans.
Also, rather than missing out on your card bills, you should consider converting your credit outstanding into easy EMIs. This reduces the interest cost considerably.
Final Words: Pause & Reset
In all: pause & reset your financial plans.
The outbreak of COVID19 is definitely an unprecedented and unthinkable chapter of the 21st century, and we hope it fades away soon at the same pace as it entered our lives. However, the lessons it will leave along the path would stay alive for a very long time.
This is the generation of Millennials that witnessed the 2008 US recession, followed by a global catastrophe in unimaginable intensity. So, the teachings of the COVID 19 emergency would impart the best financial guidance for generations to come.
The best advice is to hold on until things improve. Try to place all tenants of your financial planning at the right place, and the financial struggle will soon become history.
Happy homestay & social distancing!