How to manage your money in the post COVID-19 world

The COVID-19 pandemic is not only a public health crisis but also an economic and financial disaster. The government-enforced lockdown to slow the spread of coronavirus has left a long economic trail whose impact on our wallets and its purchasing power will be felt long after the virus will have lost its potency to our immune system.

The clampdown on economic activity has led to job losses, salary cuts and drying up of earnings despite the government advisory that employers must not terminate employees during the lockdown. Those worst hit have been the self employed and owners of small businesses besides the salaried.

This income shock could be quite painful and unnerving for many but this is also an opportunity to rearrange your finances and prepare for the post COVID-19 world. Some may question the wisdom of financial planning and budgeting in the middle of a cash crunch but there couldn’t be a better time to plan for the future than at the bottom of a cycle. Consider these suggestions:

1)     Build a big enough egg nest or emergency fund to take care of similar financial emergencies in future. This is different from saving for big-ticket expenses like buying a house, a car or an exotic wedding. Try to keep aside at least 15 percent of your monthly income to plan for an extended period of no income or a sharp decline in income in the future.

As a thumb rule your emergency pool should be equivalent to at least six months of your last (pre-COVID-19) take-home pay. If you are ambitious, plan for a year worth of emergency funds. It will take you at least three to four years to build this fund but it will be worth it.

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2)     Keep this fund separate from your general savings pool and it should not be used to fund occasional big-ticket expenses. Let it grow over time, taking advantage of the principle of compounding. 

3)     This will provide you the flexibility and peace of mind to look for a new job or alternate career in case you lose your job. If you are lucky, the fund could become a seed for a retirement fund if you invest it wisely.

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4)     This simply means saving a greater part of the income. This is especially true for young professionals who are in their late 20s or 30s. Many of them won’t have large committed expenses such as EMIs in home or car loans. They can easily create a large net by eliminating non-essential expenses. 

5)     Raising savings could be a little tough for middle aged professionals with a family that has large commitments in the form of home loans or car loans. But it’s not impossible either. Start by maintaining a diary of your daily expenses. This may sound boring but you will be surprised by the number of saving ideas you get after a month of expense diary in front of your eyes.

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6)     Contrary to popular belief, savings is not as closely related to one’s income as widely believed. The key is to keep a tight lid on expenses which means weighing every purchase decision and avoiding as much of impromptu expenses as possible. This could also mean looking for functionality in big ticket and occasional purchases such as mobile phones, gadgets and household appliances rather than brands or the prestige value. If this requires some trading down so be it. Quite often we can get things repaired for a fraction of what the new item costs.

7)     Rule of thumbs is a nice way to align your expenses with your income and cash flows. For example, rent of your house or its EMI should ideally not be more than a third or 30 per cent of your take home pay or income. Living expenses should be another third of your income. And try to save the remaining third (half of it goes to the emergency fund).

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8)     Though the government has asked landlords to not demand rent for three months, most of them will ask for it. If you are stuck in a situation where your house rent is eating away a larger portion of your income try to bring it down by moving to a cheaper location. If you own the house, try lowering the interest rate on your loan by paying some conversion cost to the bank. If nothing works see if you can pre-pay some of the home loan by borrowing from your family.

9)     The closure of shops and online stores has forced some of us to learn life skills like cooking, kitchen gardening and small time repairs. We have to stretch this experience a little further and incorporate some of it in our lifestyle to cut expenses.

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10)   Don’t be penny wise and pound foolish. Don’t cut down on healthy food, vegetables, meats or dairy products. Don’t try to save money by scrimping on your dinner table. Health is the biggest wealth.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist)

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