Financial Planning: New Normal: Personal Financial Rules in a Post-Covid World

Covid-19 took the world by surprise, devastating economies and businesses. The loss of jobs has hit families and weighed on household incomes. Amid heightened uncertainty, financial foresight is vital for Apurva and his small family of three – including his wife and five-year-old daughter. On top of his worries, he and his wife work in the financial sector, which can be detrimental. The next few years must be viewed with caution as there is great uncertainty on the horizon. Apurva wonders if he can take some action in the short and medium term to get through this smoothly.

The first step is to reformulate the household budget. The idea is not to curb every minor expense, but rather to pursue a more conservative lifestyle by avoiding certain discretionary expenses. While Apurva may be tempted to keep all of their money liquid, it may not necessarily be beneficial for their long-term endeavors. The focus should be on increasing savings. It is advisable to dedicate at least 10% of your financial portfolio to savings products.

Apurva also needs to review the family’s portfolio for avenues for short-term liquidity. However, he should avoid making abrupt decisions like liquidating all assets. If he is under money pressure, he can liquidate a bank FD or debt instead of equity-linked investments first. If one is not in survival mode, one should not dive into savings intended for retirement or future planning for the child. Simple measures like shifting investments from high risk to low risk investments can also make a big difference. It could also be a good time for Apurva to review its portfolio to ensure its investments are not adversely affected in the short term.

5 financial lessons for a coronavirus-hit family business

Stay afloat in difficult times

Not just the pandemic itself, but the slow recovery seem to have hit small businesses the hardest. Family businesses fall under this category and have also achieved success. To make matters worse, such companies are staring at another year with losses and declines in sales. While such an enterprise maintains its hopes of revitalization, what can it do to stay afloat? Here are 5 lessons you can learn from this personal finance experience.

Build a personal corpus

It is important to create a personal corpus that is inaccessible to the company. This is an important diversification tool that protects the family from the risks of the company. As high as the rate of return or control, it is a very risky endeavor to keep the entire family’s assets in one company. Even a basket of shares in a few large and well-run companies can provide the much-needed diversification for a family’s wealth.

Easy access to assets

Assets need to be accessible and useful when needed. The house one lives in and family jewelry are assets that are not easy to liquidate. This can lead to feelings of panic and despair for the family when the extreme decision is made to sell any of these assets. Some financial investments, some stocks and bonds, and deposits make it possible to overcome short and medium term difficulties. Our friend needs to sell the land and land removed, even if it is at a lower price, in order to generate cash. Keeping business alive during a slow recovery requires cash and working capital. The assets need to be funded until they can move and be realized.

Do not rely on informal sources for funding

Informal leverage and borrowing do not create the flexibility to borrow at low cost when needed. Many traditional businesses rely on suppliers and customers to fund the business. This model works informally and is based on relationships. In times of crisis and when sales growth is uncertain, it is difficult to raise money from informal sources. The books must also be in order and carefully maintained in order to raise money from formal markets. In addition, one has to get out of the financing of business operations, which is based on high cost relationships. This needs to be achieved, albeit slowly over time, in order to attract NBFCs and banks to credit and leverage.

Face the facts

If the men of the house were the first to run this business, now they must bring the family around and reveal the real state of affairs, and hence the family’s finances. Fresh ideas can come from other family members. They can also willingly cut their expenses if they know of the ongoing difficulties. They may be willing to use their savings and assets to fund some of the business needs, or they may rely on the finances of their networks. It is important to view this as a temporary phase, and the family can handle it better together than if it is shared.

A major concern in the event of job loss is the payment of EMIs. To be prepared for such eventualities, Apurva needs to contact its bank and find out the terms of an EMI vacation for a few months so as not to lower the EMI and extend the term of office. While he may be tempted to use credit cards frequently, he must avoid doing so, as irresponsible credit card use can wreak havoc on his finances. He needs to create a plan to repay his credit card fees in the next 2-3 months. Apurva needs to evaluate guaranteed savings and income plans against long-term goals like retirement. It could be a good time to evaluate retirement or retirement plans. This pandemic has highlighted another crucial element of financial planning – the need for risk insurance and health insurance. Aside from massively affecting a family’s savings, inadequate protection means that the family faces excessive stress in the event of an accident.

The best course of action for Apurva would be to assess its long-term goals, current income levels, the likelihood of loss of income, and reserves for new financial impacts such as health risks.

(The content of this page was kindly provided by the Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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