The Covid-19 has resulted in an unprecedented crisis. The countries are in lockdown and so are people. While there is a concern in the short term, there are also opportunities for the long term. Given the present state of the pandemic, one must focus on managing finances in a better way.
This is a great time for a budgeting exercise. You can follow the 50/30/20 rule or you could follow the 80/20 rule. By this rule, 50 per cent of your salary should be spent to fulfill basic necessities. The idea of following the rule is to balance savings and expenditure. Whatever your expenditure, a certain percentage of income should be invested for the future. The 20 per cent saving would help you to build a corpus to meet your life goals. Budgeting helps you to be more mindful of your money. However, one should remember that focusing solely on savings without maximizing returns means that he is sabotaging his finances.
Recently, the Reserve Bank of India (RBI) allowed a three-month moratorium on loans and credit cards. This is a huge relief for those who are facing a cash crunch. However, if you are able to pay, you must not take advantage of the moratorium as it is just a deferment and not a complete waiver of EMI. By taking advantage of the moratorium, you are increasing your debt burden. In fact, if you have cash, it will be wiser to retire costly debt or you can increase your EMI outgo. This will not only help to reduce interest but also significantly lower the tenure of the loan. Instead of spending on interest, you should focus on saving every penny by whatever means you can.
This is the time to take stock of your emergency funds. Things do not change on a weekly or monthly basis. A sudden medical emergency, a car breakdown or a sudden lay-off can mean an unexpected bill. You must be prepared should the situation turn for worse. Ideally, you should strive to save as much as possible. Even if you follow the above rule, it is not necessary to spend the entire 50 per cent or 80 per cent. You should begin prioritizing your expenses. A corpus covering at least six months is necessary to live a stress-free life. An emergency fund does not mean holding cash. It means investing in liquid assets such as overnight funds which not only helps you to earn additional money but also can be liquidated on demand.
Goal setting is a wonderful exercise. Setting and achieving short-term goals helps you to remain optimistic. The present lockdown has put brakes on spending money on dining out, movies and shopping. You can use this opportunity to save more. This will make you feel accomplished and inspire to remain on track of your long-term goals. The present crisis has hit the market hard. Many are losing nerves and pulling out investments. If you are pulling out money due to panic, you are making a big mistake.
Regardless of market levels, you must save at least 10 per cent of your income for retirement. There is no better way to accumulate a decent corpus than investing in stocks. If volatility scares you, you should stop looking at the market on a day-to-day basis. The best way is to automate your investments. The set and forget mindset will surprise you a few years down the line. Goal planning should be done with an all or nothing mindset. Only then you will able to keep noise at bay.
Warren Buffet once said, “Be fearful when others are greedy, and be greedy when others are fearful.” This seems to be apt in the present environment. The valuation of stocks, after significant correction, has become attractive. If your goal is a few years away, you should systematically invest and focus on your goals. The power of compounding can help small savings translate into a bigger corpus. If you are still nervous, take it easy and hold on until the economic scenario becomes clearer. Do not take decisions in a panic.
In the present environment, full of uncertainties, all you can do is to remain positive. Find innovative ways to keep you engaged, this will help to lessen the stress and look things from a different perspective. Consult your financial advisor; he can suggest creative ways to manage money. When you have some savings, you will have freedom in your mind knowing that there is always a buffer that you can utilize if money is needed urgently more so if you are living from one salary to the next. To be financially independent, you need to increase your savings because the less you save, and the more debt you accumulate and the less independence you will have.
The author is Founder, inverstoronline.in
This article was originally published in Enterpreneur India. The views expressed are personal.