It’s been a year of illness, job loss, being cooped up at home, endless zoom calls and more. But if there’s one thing that people have been forced to do in a year where they found the rug pulled out from under their feet was to take stock of their finances.
It forced upon people the importance of financial planning, especially for those in the early stages of their careers. The pandemic also saw a surge in trading, with a million new demat accounts opened for the fifth straight month in December, and a record 6.8 million new demat accounts were opened between April and October 2020.
As we gear up to leave this year behind, here are some lessons we learnt and what we can do going into 2021.
Digital lender Indialends founder and CEO Gaurav Chopra, says that the most important lesson the year taught people was the need for an emergency fund, as a crisis like this could keep people out of a job for many months and can also bring unexpected and large medical expenditure. “Inadequate funds/savings have compelled borrowers to opt for moratorium, for which borrowers will have to pay a higher interest rate or extra EMIs. One should be prepared for the worst and make the necessary arrangements to make sure that they get to live a normal life,” Gaurav says.
Prateek Jain, the co-founder of investment platform Winvesta, says that a crucial lesson for people was not to put all their eggs in one basket, but to diversify their investment portfolio.
“When Indian markets were not performing well, many sectors in US markets (technology, FMCG, e-commerce) and gold were at their all-time high. A globally diversified portfolio may come as a rescue during the time of a financial emergency,” says Prateek.
Vinay Bagri, co-founder and CEO of Niyo, tells TNM that the third lesson is to prepare for any contingency that can derail your financial planning process.
“The first priority has to be maintaining enough liquidity in the form of cash or readily redeemable securities/assets, such as liquid mutual funds, which is enough to cover basic living expenses for at least six months. Many professionals lost their jobs due to COVID-19 related business uncertainty and faced financial hardships. Simultaneously, the massive crash in equity markets between March and April, and the subsequent, far more spectacular rebound has reinforced the time-tested principle of sticking to a long-term financial planning and investment roadmap, such as by investing in mutual funds through SIPs,” he says.
For young professionals with limited savings, Indialends' Gaurav says that they should reassess their budget and distinguish between necessary and luxury expenditure. “There is no harm in fulfilling luxury desires but it is important to know where to draw the line. It is imperative to have adequate emergency funds for a crisis situation,” he says.
Prateek from Winvesta says that the pandemic has severely impacted most investment avenues, and the best way for young professionals to hedge themselves against risk is to diversify their investment — across various asset classes with varying degrees of risks and returns to minimise overall risk.
“Equally important is to strictly align your investments to your risk appetite, financial goals, and liquidity requirements. You should be careful not to chase unrealistic returns from your investments. Lastly, do not discontinue an essential investment without thinking it through because the longer you stay invested, the better are your chances to fetch desired returns. Investments that yield dividends or passive income can also help during such times,” he says.
> Keeping track of your income - The sooner you learn the art of balancing the urge to spend and the need to manage your expenses within a budget (sometimes by delaying gratification) the sooner you'll find it easy to keep your finances in order, says Niyo’s Vinay. In a similar vein, Gaurav says we can all save more than we can.
> Emergency fund - No matter how much you owe in EMI or credit card debt, and no matter how low your salary may seem, it's wise to find some amount — any amount as small as 5-10% of your net take home salary in your budget to save in an emergency fund every month, preferably in a liquid and safe instrument such as a liquid mutual fund. “Having money in savings to use for emergencies can really keep you out of trouble financially and help you sleep better at night. This is even more critical in the uncertain times of the post-COVID world, where one may have to take a pay cut or even face the prospect of job loss,” says Vinay from Niyo.
> Know where your money is going - According to Prateek, financial planning is a process and it needs to be reviewed from time to time and changed accordingly. “Financial planning can’t be rigid as no one is entirely sure of what the future holds,” he says.
He adds that one should never ignore tax implications. It is always advisable to beware of tax implications attached to every saving/investing instrument, he says.
For this, Vinay says that budgeting is the way to go to track expenses across categories. “There are several tools provided by fintech companies or banks for budgeting and expense tracking. Once you track your income and expenses during the course of a month, you'll realize that making small, manageable changes in your everyday expenses can have just as big of an impact on your financial situation as getting a raise,” he says.
> Have targets - One should categorize each financial goal as short, mid, or long-term with a specific target in mind and with a particular target date to complete the same. “It is essential that the targets you set have a certain completion period or you will end up never achieving them,” says Prateek.
> Don’t take loans on your credit card - It has a high interest rate and untimely payment can damage your credit score. You need to have a strong credit score to apply for a personal loan in a situation of emergency. Avoid credit card rollovers and always pay in full
> Don’t have all your eggs in one basket - Diversify your investments, across asset classes and internationally. Do note, however, that overdiversification can lead to suboptimal returns in the long term.
> Taking financial decisions without proper research and guidance: Have a sound plan for your finances. Don't let short-term market volatility derail your long-term financial planning and investment plan.
> Rainy day: Manage liquidity during times of emergency, save for a rainy day in an emergency fund.
> Insurance: Have appropriate insurance to protect your assets.
> Not tracking money: Tracking your money gives you greater awareness of your spending habits and what you’re actually doing with your money.
> Not setting a financial goal: Coming up with financial goals helps you set the parameters of your budget and gives you targets to focus on.
Vinay says it is important for everyone to seek the consultation of financial advisors unless they are well equipped and versed with financial planning and investments.
“If you are handling your own financial planning, you should definitely conduct a thorough evaluation of your financial goals, income and spending patterns in the post-COVID environment and chalk out an investment plan. Participating in the upside of equity markets through a mix of balanced mutual funds, multi-cap funds, and large cap funds, along with fixed income assets and gold seems to be a prudent strategy for an average investor right now,” he says.