After shutting the world for six months, nations are unlocking their economies to stimulate activity. As you pull yourself together, you need to look at your finances. An emergency fund has to be your top priority. The crisis has underscored the need to have cash reserves of some kind in the bank. The amount of that reserve depends on you.
It needs to be something you feel is good enough for six to eight months of expenses without an income. To create such a cash reserve is a challenge for anyone. Most of the people have money locked into assets. Many have loans that they are servicing. To organise an emergency fund, you have to look at both assets and liabilities all over again. Get in touch with a professional financial advisor as a first step. There is a lot you need to talk to him or her and create headroom for money that can stay in liquid funds or fixed deposits.
Assets
You bought physical assets like property, vehicles and gold with your income over the years. It may be a good idea to segregate your physical assets into need and want. Key learning from the lockdown is perhaps a realisation that your needs are fewer than your desires. If you own the house you live in, you cannot change much there. But if you have a second home that is given out on rent or kept as an investment, you may want to ask yourself a few questions.
It may be a good idea to unlock value out of these and convert them into cash. Gold that is not jewellery and just an investment, you may want to cash out some. Many of you own two or three cars. You may want to reconsider your commuting needs in the context of social distancing and lockdowns. T he problem with assets is that they come with recurring maintenance. If your income is hurt, it is not possible to manage the upkeep of these assets.
If you do not regularly clean your second or third home or manage your vehicles, you will spend more money on getting them fixed later. T he same applies to your financial assets. You could have invested in multiple mutual fund schemes or unit-linked insurance policies when times were good. You may discuss with your financial advisor and reduce the number of funds you own. It is time to create an efficient portfolio. For every one individual in India, there are 4-5 folios and multiple schemes. Try to simplify your mutual fund investments.
If you own stocks, it is time to put your money into profit-making, dividend-paying companies only. Fundamentally strong businesses that can support growth in these trying times are likely to ride through the harsh economic environment. Try not owning too many stocks at this juncture. Your investment in insurance may also need a clean-up. You took insurance policies that you did not need in the past but decided to help a friendly agent. You invested in the name of your children, wife or parents to park surplus funds. However, insurance is for protection. It is not an investment. Discuss with your financial advisor about adequate insurance for protection.
Liabilities
Your loans are your most significant liabilities. You cannot create any wealth till the time you owe money to people. An emergency fund could get wiped out if you have to dip into it to pay off your liabilities suddenly. Paying off high-cost loans must be a top priority. Pay off the total amount due immediately. Your loans carry a high-interest rate too. You may want to work on a plan after you are done with your credit cards.
On your home loans, it is a good idea to talk to your loan officer and renegotiate or reset the interest rate. Banks will not tell you about this. However, you need to fill up a form and submit it to your home loan servicing branch. For a nominal fee, you could reduce your home loan by up to two per cent. If you reduce your tenure instead of equated monthly instalments, that could save up a lot of money you would otherwise pay as interest. Cutting your monthly expenditure on loans and other expenses can help create headroom for an emergency fund.
(The author is editor-in-chief at www.moneyminute.in)