Personal Financial Life – Before and After COVID 19

We are going through a lockdown first time in our life and how our life has been changed?

I cannot invite my friends to my house. I cannot go out in my car. I cannot show my lifestyle to anyone – the lifestyle which took my 10-15 years of hard work with lot of loans. Staying at home made me realize one thing.

Almost 50% of my expenses are life style expenses, my normal living expenses are just 50%.

Now, I am worried. I am worried about job lose. I am worried if I would be able to pay the EMI on home loan and car loan. Though I was advised to have emergency fund in the times of crisis, I never imagined crisis like this one and I do not have one!

This too shall pass but not without changing the very basic thought process of our personal financial lives. Most of us will try to come with better financial plans to avoid financial disaster like this.

LIVING EXPENSES Vs LIFE STYLE EXPENSES

I have many clients who always used to say that we are not able to invest enough for our financial goals as our expenses are very high. The same clients are calling me now saying that they can actually invest more because their expenses have been reduced by half. Most of them realized that life style expenses for them were too high.

I am not saying that going out for dinner once in a fortnight with your family should be avoided. But going out in every 2-3 days can be avoided.  I am not saying that you should not purchase a house or a car, you definitely should. But if you are purchasing all these items with maximum loan amount, it is definitely going to impact other financial goals.

It is always better to enjoy life within in our means. Enjoy a lifestyle which gives satisfaction to you and your family, not the lifestyle which gives jealousy to your neighbor and stress to your financial life!

I am not going to explain how my expenses reduced by 50%. I think, the story would be same for most of you.

INSURANCE – BACKUP PLAN

There is another set of clients whom I persuaded for last so many years to purchase term insurance. Now, I am getting calls on how to purchase term insurance online during this lock down period itself!

Clients who never cared about taking a health insurance cover beyond corporate cover are asking how much health insurance cover should be taken.

No one is worried about the cost now. I used to tell this to my clients that there is no harm in taking term insurance and health insurance cover by spending around  40,000/- per annum but few of them were more concerned about returns on this amount.

Ok, I am talking this about very few clients. Most of them had already purchased it and they have the mental peace now. I am just talking about the few who never purchased it despite the continuous follow up. Term Insurance and Health Insurance cannot be compromised because it is the backup plan. We cannot purchase them when we need it!

EMERGENCY FUND

Another cause of concern is the emergency fund. I have seen people asking the question – how to get maximum return on emergency fund. I always had one reply – keep it in savings account and open a sweep account for the same or you can keep it in FDs. Never expect any great returns on your emergency fund. You should be able to access the funds immediately even in midnight. 1% – 2% extra returns on this will not make any difference in your life.

INVESTING IN EQUITY

Regarding investing in equity markets, this was my reply to one of the clients who wanted to invest 50% in equity markets at the time of retirement.

Question – You have suggested just 20% of the retirement corpus in equity funds and balance in Debt. You have assumed just 1% return above inflation. Since I was investing in equity funds for the last 5 years, I feel, I can invest 50% of the retirement corpus in equity funds so that I can generate around 2% return above inflation.

My Reply – You may be right if equity gives you 12% returns year on year.  But what will you do if the stock market crashes and the returns are negative 20%-25%? It is not worth taking risk for additional 1% -2% returns.

But this 40% fall was beyond anybody’s guess. And that precisely is the reason to have a proper asset allocation according to your age and risk appetite.

Coming back to the topic, let us make a table on what will change in Personal Financial Life – Before and After COVID 19. (Though people can argue that what is use of investments if there is no surety of future, let me enjoy my life now. Let those people enjoy their life, the people who are serious about their financial life will definitely change it.)

I do not know how much people will change but if you are serious about your financial life, these changes can be considered.

If you have any other point, please let me know. I will add in the table. Till then

Stay home: Stay Safe.

Thanks to Dr. Debendra Nath Panigrahi, I am adding his comments in the article.

#1. Spending Budget: Everybody should create one monthly budget by appreciating the difference b/w needs and wants and strictly stick to it. Everyone should also sincerely follow the personal finance popular principle of live within one’s means, nay, below one’s means.

#2. Emergency Fund  Deployment and Size: The purpose of having an emergency fund is not earning higher return but having liquidity, with least cost and least time. So the emergency fund should be deployed in highly liquid assets like SB, Linked SB & FD with sweep in and sweep out facility and liquid funds etc.
The size of the emergency fund should be adequate enough to cover one’s living expenses and other mandatory expenses like house rent, loan EMIs, children’s tuition fees, life and health insurance premiums for 6-24 months (depending on the nature of one’s job) plus uninsured contingencies like out of pocket hospitalisation expenses in case of insured family members beyond individual item-wise caps in case of hospitalisation as well as hospitalisation expenses of dependent family members not covered by any health insurance.

#3. Asset Allocation of Post-Retirement Corpus: The objective of post-retirement corpus asset allocation is driven more by liquidity and cash flow sustainability for an unknown lifetime rather than earning 1 – 2% higher yield, at least for the vast majority of retirees following the safety-first principle.