Contingency planning: Four steps to financial prudence in Covid times

Now, these are also the times of record-low home loan interest rates.

We are already deep inside the Covid-19 crisis but the end of the tunnel isn’t yet in sight. It’s time to put in extra effort to build a robust financial contingency plan. Let’s see how we can do that.

Focus on boosting your cash reserves
Widespread job losses, pay cuts and diminishing business earnings have defined these uncertain times. If you lose your job or income amid such a situation, getting your income channels back on track could be difficult if not impossible. As such, a standard emergency fund worth three months of your expenses might not be adequate. It’s time to increase its size to at least 6-12 months of your expenses if your current finances permit. This fund will be your primary cash reserve if you, unfortunately, lose your income in the coming weeks or months.

To achieve this target, you must exercise strict cost-cutting measures and minimise non-essential expenditures. The lockdown may help you in this to some extent as you no longer have to bother about expenses like daily commutes and shopping.You can also try to carve out a dedicated Covid emergency fund in addition to your regular contingency fund and park your savings in a highly-liquid instrument like an FD or a savings bank account.

Top up your insurance plans
Maintaining adequate insurance cover is of utmost importance during this phase of heightened health risks. Aim for a life insurance cover worth at least 10 times your current annual income so that your dependent family members are not left in the lurch if something untoward were to happen to you. For that, see if you could top up your existing life insurance plans.

Also, you risk losing your emergency fund if any of your dependant family members require hospitalisation. So, buy a health insurance plan for your family if you don’t have one already, or top-it up or get a super top-up to at least `7 lakh cover if your existing plan is of lesser value and you stay in a metro. This is also relevant for those who are solely dependent on their company-provided group medical plans because those would be of no use if you lose your job in the current crisis. Adequate insurance cover will give you the much-needed mental peace, especially if the Covid crisis persists.

Servicing home loan
Now, these are also the times of record-low home loan interest rates. So, if you have the necessary out-of-pocket funds and you get a good deal on your preferred property, you may start a home loan at this stage after a careful evaluation of your finances. However, in doing so, ensure your contingency funds and insurance protection do not get impacted. If you’re unsure, see whether you could delay your plans until things stabilise.

Also, it might be a better idea to go for a ready-to-move-in property than an under-construction one as the latter may involve a delay in project completion due to the ongoing lockdown. Besides, you may also go for smart repayment options where you pay only the home loan interest and not the full EMIs until you get possession.

Invest sensibly
Firstly, avoid starting a new investment if you’re struggling to repay your EMIs in the current situation. However, if your income channels are intact, you may continue investing strictly in line with your returns expectations, risk appetite, and liquidity requirements. Also, don’t completely look away from FDs owing to their recent low returns as capital protection has become as important as capital appreciation in the current scenario.

If your investment horizon is more than five years and you are invested in top-rated equity mutual funds, you should ideally continue with your SIPs. If you’re planning to start a new investment, you can consider investing in a diversified manner in top-rated mutual funds, FDs, small saving schemes, and also in digital gold through Sovereign Gold Bondss. You may also want to evaluate your current risk tolerance in light of the volatility recently seen in investment markets.
While you prepare your contingency plans to tackle a prolonged pandemic situation, you should also review your financial health more frequently. This includes checking your credit score at least once a month and also reviewing your investment performance and initiating a portfolio rebalance if required. But your primary focus should be boosting your cash reserves, timely repayment of your debts, and maintaining adequate insurance cover to consolidate your finances in case the ongoing crisis persists.

The author is CEO, BankBazaar.com