At the dawn of 2021, India almost started believing that Covid-19 has passed over us and life can slowly start getting back to normal, just like the pre-Covid days. Little did we know that the new wave would come back stronger and with a magnitude that very few had imagined. This has gotten all of us worried about our health and that of our loved ones. As we brace ourselves for a potential impact on our health, a lot of us also worry about how it could hamper our financial planning.
In 2020, people were worried about job losses as they directly affected their income. This year, however, the scale of worry has risen because of the cost of hospitalisation and other medical needs that a large number of the younger population is incurring. With this two-fold impact of Covid, we must revisit our financial planning. Here’s how.
Redesign your financial plan
Since we are living in Covid times, here are the three important pillars that should form the basis of your financial plan:
- Adequate life and health insurance coverage,
- Sufficient emergency fund
- Well-diversified portfolio as per your risk tolerance level
Invest in life and health coverage
Before the storm of the Covid-19 pandemic, many people believed that life insurance is more of an expenditure than an investment. The fear instilled by Covid-19 has resulted in people rushing to buy life and health insurance. Similarly, a health insurance policy should form part of every investment portfolio. Ideally, you should have a cover over and above the one that your employer gives you. While there is no such thing as an ideal sum assured in any individual health insurance policy, given the current situation, many personal finance experts suggest having a minimum health insurance cover of Rs. 5 lakhs.
The life cover must be sufficient to support your family in maintaining their living standards. Therefore, It is ideal to have a sum insured that is minimum 20 times of your annual income. With an adequate health insurance cover, expenses related to major illnesses can be easily covered without it resulting in a heavy cash outflow from your end.
Set up an emergency fund
In these difficult times, an emergency fund can help you to face a medical emergency, sudden job loss, reduction in salary, or other forms of a severe impact from a pandemic like the ongoing one. As a thumb rule, you should set up an emergency fund that is somewhat closer to three to six months’ worth of important and unavoidable expenses. If you have children/dependent elders within the family and are the only earning member, the amount must cover at least 12-months of expenses.
Mentioned below are the three important aspects to consider while establishing an emergency fund.
- Security: The emergency fund is meant to help you sail through a tough situation. Therefore, do not use it in any short-term avenues that have a higher risk of capital erosion.
- Accessibility: It will be a fruitless exercise to set up an emergency fund and not have it available during an actual emergency. Therefore, ensure that the funds are easily accessible to take care of any immediate financial needs.
- Liquidity: How quickly you can convert your investments into cash will define the liquidity level of the emergency fund. To keep the emergency fund highly liquid, make sure that liquid cash, bank deposits, short-term investments form part of it.
List down sources of funds
If you end up having a health condition and a resulting prolonged leave from work, it could mean stress on your financial situation. Therefore, learn to conserve cash and list down multiple sources of funds that can be accessed in case of a need. Cut down on additional debt and use your credit card purely on a need basis. Make sure that you spend as per your repayment capacity and keep ready as many liquid assets as you can.
It is equally important to inform your spouse/other family members about your investments, bank accounts, insurance coverage. We have been seeing cases of individuals getting infected by COVID go from bad to worse in no time. In such a scenario, your near and dear ones should have a clear understanding of your finances.
Consider keeping up with existing investments and maintain diversification
If one investment doesn’t show positive results with investment diversification, you can rely on other investments that may have sustained adverse conditions. This will help in reducing the overall loss of the portfolio. A truly diversified portfolio must have more than one form of asset class such as equities (stocks), fixed income (bonds), cash and cash equivalents, real estate, and commodities. Pick and choose these as per your risk appetite.
Considering uncertainty around the duration of the second wave, it is best to get out of riskier assets. Instead, invest assets that can be easily liquidated like bank fixed deposits, or mutual funds. This will help you easily arrange finances if you have to pay for treatment or provide for living expenses if there is no salary or a job loss. Also, if you have your regular income coming in, make sure you keep up with your SIPs in mutual funds. Do not let the market fluctuations affect you.
Illiquid assets like real estate usually take a prolonged time to sell. Redeeming from open-ended mutual funds (non-ELSS) is easy and can give you access to cash when needed. Hence, initiate necessary actions now to make funds available when you need them
To be money-ready for tough times like Covid-19, have clear financial goals that are based on assumptions as per the current situation. For good financial planning, you may also need to amend your priorities as per the life situations. This is the time when you must revisit your budget and make the required changes. To a large extent, all these measures can ensure that you will not be financially stressed in tough situations and still achieve your life goals.
To conclude, when we are struck with an illness, we tend to tap into accumulated assets that would otherwise be kept aside for retirement or children’s education, etc. Current times demand that we reflect and understand how best we can incorporate certain protective measures into our financial portfolios. Many health-related financial difficulties can be tamed by such measures.