The year 2020 brought lots of bad news for those who lost their jobs, who willingly or unwillingly had to accept salary cuts, and also for those who had to get used to surviving on a very limited budget and resources. But one important lesson that the humankind learnt was the importance of following financial strategies to maintain long-term financial fitness and sufficient emergency funds.
The economic disruptions caused due to lockdowns adversely impacted a large section of our population. But those who followed these strategies were able to sail through these turbulent times.
The only way to ensure debt servicing capacity is to factor in loan obligations and other debt repayment in your emergency fund and to have adequate funds for at least a six-month period. Those who had adequate funds in emergency savings were better equipped to tackle the pandemic. Those who didn’t were adversely impacted, leading them to opt for moratorium on loans and credit cards.
Reserve Bank of India’s financial stability report released in July 2020 stated that around 50 percent individual borrowers availed loan moratorium as of April 30, 2020. One should always park your emergency funds in instruments that allow instant withdrawals. Emergency funds are unavoidable expenses like rent, insurance premiums, utility bills, among others.
The equity markets underwent steep correction during March and April this year due to nationwide lockdown and global economic uncertainties. Many investors decided to stop their equities after profits made from the past 3-4 years ran into losses. But it is crucial to continue SIPs during turbulent times as quality shares would be available at attractive valuations.
Bearish markets are an excellent opportunity for wealth creation as equities are available at attractive valuations. Those with surplus funds should make the most by topping up their existing investments to build a larger investment corpus. However, one should avoid using their emergency funds for short-term financial goals as a financial emergency may force you to redeem your investments at a loss.
The pandemic also stressed on the importance of maintaining adequate health cover for family and self. The increased hospitalization cost can wipe off life-long savings of many. Working individuals should also opt for separate health policies.
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