A lot of you have saved up. There is more money in your bank saved due to a slew of reasons. For some of you, worries about future income top the mind. For many, expenditure is lower than before amidst the pandemic. You are going out less. You are spending little or no time commuting, working from home and enjoying home-cooked meals.
The Reserve Bank of India has recently published data of household financial savings for the quarter to June 2020, the peak of the lockdown. Estimates show a jump to 21.4% of gross domestic product or GDP against 7.9% in the year-ago period. That is nearly three times more than usual. It is the highest in at least three years, according to the RBI survey.
The aggregate bank deposits in India stood at Rs 138 lakh crore in June 2020, a surge of Rs 3 lakh crore over March 2020. The increase in bank deposits has continued till October 2020, and bank lending has remained much lower than the surge in bank deposits. That is despite deposit rates touching new lows since March 2020.
The survey says that there is a ‘dash to cash’ behaviour due to the extreme uncertainty. The currency holding on the parts of households reflects a flight to safety. You have money at home that is generating no return. Your saving over spending is creating a surplus in the financial system as banks are unable to lend at the same pace. As a result, your money is not getting deployed. You are getting an interest rate that is much lower than the consumer price inflation rate prevailing. Effectively, keeping money in banks is eroding your savings.
The survey finds that a lot of you have put money into financial assets using mutual funds due to low returns on the bank deposits. Equity assets have witnessed a steady flow since March 2020. Benchmark indices are now at a higher level than they were before March 2020. There is also a sharp jump in subscription to insurance products, according to the RBI survey.
If you are worried about the uncertainty ahead, you may want to organise your finances better than before. Investing in mutual funds or buying insurance policies without analysing your actual need could hurt your financial well-being. If you are still at work or get a steady monthly inflow, you are in the best position to manage your finances. The surplus you have created as a result of cutting down on your expenditure could be used to fortify your financial situation. You could get rid of any expensive debt like credit cards first. Then, focus on personal loans.
Assuming you have a surplus at the end of the month, you need not rush to pay off home loans. The thing about home loans is that it is the cheapest loan an individual can get. You also get tax benefits for financing a home acquisition. Hence, there is no need to panic and pay off the cheapest loan in a hurry.
Create a list of major annual expenses you have to incur over the next year and provide for them with the surplus. For example, your child’s term fees for the rest of the year or next year or your annual life insurance premium.
A yearly subscription for your satellite television or internet broadband and others. If you have not started on retirement savings yet, there is no better time than today. One of the first principles of personal finance is that you should spend what is left after investing. It is easier said than done when you have aspirations, and your family expects you to fulfil them.
However, the pandemic opens a unique opportunity where your family is unlikely to make demands due to force lockdowns. Sign up for long-term retirement savings programmes. If you have not subscribed for the National Pension Scheme or NPS, it may be a good idea to opt for it for your retirement. Channelise your retirement savings into the scheme that is based on the ‘defined contribution’ principle. It is essential to speak to your professional advisor before choosing anything else.
(The author is editor-in-chief at www.moneyminute.in)