Covid-19: How to deal with your personal finance concerns in such uncertain times?

To deal with their finances during such uncertain times, one should follow the most basic things of financial planning.

The lockdowns imposed to contain the surge of Covid-19 infection have caused widespread economic disruptions due to closure or suspension of business activities in many organisations – from small and medium enterprises (MSMEs) to bigger companies. As a result, many people are facing financial hardship after job loss or salary cut – in some cases stoppage of entire salary payments.

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To deal with their finances during such uncertain times, one should follow the most basic things of financial planning.

Emergency Fund

The first step to deal with such a situation is building an emergency fund. One should keep sufficient amounts needed for at least six months in liquid form – cash, savings bank deposit, breakable fixed deposit (FD), liquid/short-term fund etc – so that the person may sail through a crisis period without much hardship.

“As the nation grapples with the second wave of Covid-19, many people are left worried about their personal finances once again. In order to be prepared for such unprecedented circumstances, it is important to maintain an emergency fund that can cover at least three to six months of basic necessities such as food, rent, and monthly utility bills,” said Raghuvir Gakhar, CEO, PC Financial.

Insurance Cover

Insurance is the most important instrument that provides financial cover against unforeseen eventualities. Individuals should take life insurance to ensure protection of their financially dependent family members, as well as health insurance to protect their savings in case of huge financial burden during hospitalisation.

“The current health crisis has also highlighted the need for quality health and life insurance that offers broad coverage,” said Gakhar.

Credit Score

In case of absence of adequate emergency fund and/or insurance cover, a person may need to take some loan. To get a loan at a lower interest rate, one should maintain a healthy credit score. For this, timely repayment of existing loans and credit card dues etc must be done. Apart from loan, one may also opt for a credit line to ensure quick availability of money on credit up to the set limit.

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“In order to have some cash liquidity, it is also advisable to maintain a good credit score because, in case of the need for cash, it will help you access pre-approved loans,” said Gakhar.

Long-Term Loans

The current low interest regime may prompt you to buy long-term assets like cars, AC etc on credit, as well as immovable assets like property. However, taking a long-term loan creates an obligation of spending future earnings to repay the loan. In case of loss of earnings due to some emergencies like Covid pandemic, it aggravates the financial hardship. So, it’s better to avoid unnecessary purchases on credit to reduce future financial burdens.

“Another concern is the purchase of immovable assets due to low-interest rates. The decision should be taken after considering both the short-term and long-term impacts of the pandemic. Last but not least, it is vital to maintain a healthy debt to income ratio and not splurge on future earning potential,” said Gakhar.