Financial planning: Are you ready to ride out a financial crisis?

By Lakhwinder Kaur Dhillon

The Covid-19 pandemic has compelled everyone to grasp a few salient lessons on building financial immunity along with physical immunity. Regardless of earnings, savings is imperative with a high degree of discipline where consistency is the key to achieve any goal.

When we have a regular income stream, we usually follow an earning and spending approach. But with the outbreak of this pandemic and forced lockdown we recognised that we could survive with a set budget and can save even more than expected. Planned monthly expenses and spending wisely helps in managing the unforeseen.

Right insurance cover
Relying only on an employer’s health insurance plan is not prudent. A large section of the society had neither life cover or health insurance. As life is unpredictable and successive waves of coronavirus infections across the globe in the last two years have proved, buying life insurance is the topmost priority for creating financial security for family members. Life cover must adequately cover all the liabilities such as house loan, car loan, child’s education, etc. All the non-negotiable financial goals should be covered in the life insurance plan so that if the breadwinner is not around then these essential requirements are not compromised on, and financial stability is maintained.

Further, during the pandemic people scrambled for medical support and the exorbitant cost of emergency medical services exemplified the need of health insurance. Health insurance for all the members of the family is a must. Mediclaim to cover the hospitalisation charges or critical health cover against life threatening diseases may be considered, depending upon the family members’ general health condition or prior experience and age composition.

Creating emergency funds
Having an emergency fund is a huge financial support at the time of uncertainties as it helps stay afloat during financial crises. An emergency fund to cover at least three to six month of living expenses or spending is very crucial. Many people suffered huge business losses or had salary cuts or lost their jobs completely during the pandemic. This emergency corpus would help in sustaining the family till another job or source of earning is arranged; it’s a cushion when the unexpected has become a reality. There is no assurance that such crises will not arise in future, therefore it is imperative for everyone to create an emergency fund to fight against such unexpected contingencies.

Avoiding debt traps
Debt always comes with an obligation of interest payment. When incomes are regular, we do not bother with interest rate or interest payment obligation and get involved in extensive spending through credit cards and personal loans. Many end up paying only minimum payments and the interest amount on unpaid credit keeps piling up, dragging them towards a debt trap. The situation becomes ruinous with a financial crisis that strikes due to unforeseen incidents like that of the pandemic. It is always advisable to avoid such high interest instruments. Spending through credit cards must be limited to the extent we can pay the bills on/before the expiry of credit period.

Proper allocation of assets
Saved money is largely parked in two types of assets—physical asset and financial asset. Most people have a large net worth by investing in physical assets such as real estate, gold, etc. These physical assets are illiquid, and it is very difficult to liquidate them quickly. On the other hand, allocation of savings in financial assets is crucial as it can be liquidated easily during an extreme situation. Allocation of assets based on financial goals through proper financial planning is very important for every individual to create future financial security to manage extreme conditions.

The writer is associate professor, Department of Accounts and Finance, Amity Business School, Amity University