27 Jan 2021 | 5 min read
As a financial emergency is uncertain and unpredictable, we all should be prepared with some advance arrangements to soften the blow.
The Covid-19-induced lockdown adversely impacted the finances of people from all classes and social strata, leading to widespread liquidity crunch, pay cuts, layoffs, and non-payment of loans and other obligations. The economic disruption brought about by the pandemic reinforced the importance of following financial strategies for long-term financial stability.
In 2020, lots of people were caught off the guard just because they made a few financial blunders. It is a common practice to resolve to meet various goals when a new year kicks into gear. Hence, to do better financially in 2021, make sure not to repeat the big mistakes you made in 2020. Here are the 5 important money lessons for 2021.
The coronavirus pandemic impacted the debt servicing capacity of a large section of individual borrowers, who were forced to apply for the moratorium given by the Reserve Bank of India (RBI) on different types of retail loans such as a personal loan, home loan, business loan and credit cards as well. As of 30 April 2020, about 50 percent of individual borrowers had received the loan moratorium as per the Financial Stability Report of RBI in July 2020.
It is important to have some emergency funds in place to ensure debt-servicing capacity in such financial exigencies. Individuals who have some savings for unforeseen exigencies managed to repay the loan EMIs and credit card dues. On the other hand, those who didn’t have adequate emergency funds had to apply for the moratorium.
The emergency fund includes unavoidable expenses such as insurance premiums, home rent, monthly contributions towards crucial financial goals, and utility bills of at least six months.
As financial exigencies come unannounced, park your emergency fund in instruments that allow instant withdrawals. Thus, park your emergency fund in high-yielding savings accounts offered by some private sector and small finance banks. You can also use the internet or mobile banking to invest your emergency funds in high-yielding FDs (Fixed Deposits) offered by these banks.
Equity markets witnessed many changes due to global economic uncertainties and a countrywide lockdown in 2020. This market correction led many investors to stop their equity SIPs because of the fear of further losses. However, consistent SIP investment during such market turmoil is important for investors, as quality shares would be available at attractive rates. In addition, continuous contribution in SIP during the bearish market offers benefits to investors through rupee cost averaging as they can purchase more units at lower NAVs. It will reduce the average investment cost irrespective of the market timing.
The equity market started to recover steadily from the lows in April to new highs in November. Individuals who continued with their SIPs bought units at lower NAVs, averaging their investment cost. They will earn higher returns than those who stopped contributing to SIPs.
Sometimes we can’t resist the temptation to overspend and take too much debt. But as tempting as it may be to whip out your credit cards to cover your expenses. It could cost you a lot of interest. In 2021, make sure to borrow affordable money. You should apply for a personal loan that charges less interest rate than credit cards. If you have a good credit score, personal loan interest generally ranges from 10.50% to 25% per annum. While the interest rate on a credit card ranges from 2.5% to 3% per month i.e. 18% to 36% per annum.
Steep market corrections resulting from the disruption in the market due to the COVID-19-induced-lockdown extends excellent chances for wealth creation. Individuals with investible surpluses can stand to benefit from such opportunities by investing lump-sums to top-up their investment. It will help them building a large investment corpus when the market rebounds. Investors who showed risk tolerance, patience, and wisdom to exploit the bearish market phase during March-April in 2020 would get higher returns as the equity market makes new highs.
It is advisable not to use emergency funds or cash saved for short-term financial needs when you top up your equity investments during market corrections.
The coronavirus pandemic also reinforced the importance of taking out a health insurance policy for self and the family. The enormous cost of hospitalization due to pandemic can wipe off your life-long savings in a short time. Working employees who are covered under group health policies by their employer should also buy separate health policies to get adequate coverage to fulfil rising healthcare cost. Group insurance coverage may not be enough to meet such expenses and such policies lapse when you change your job. Experts advise buying term insurance that can cover 10-15 times of your annual income.
If you already have a term policy, you should increase the sum assured by purchasing fresh term policy as and when your annual income increases.
COVID-19 pandemic taught us many lessons across areas like healthcare, finance, etc. The above described financial habits will help you to face and overcome any financial problems in the foreseeable future. You must save for future, limit unnecessary expenses and invest in funds during bearish market. Although some problems are unpredictable and unavoidable, being prepared in advance can mitigate their impact.