From tolerating boredom to becoming more industrious, the COVID-19 pandemic has played a crucial role in imparting many lessons. It has also put the Do It Yourself caps on many of us and we also learned to be grateful for the things we already possess.
Apart from life lessons, almost universally, it has taught us a few about money also. If you are able to work and receive a regular pay cheque right now, you are privileged and there is also a good chance that you are spending it efficiently.
If we recollect some key economic events in history, prudence and originality came to define some generations, such as the Great Depression or World Wars. The COVID-19 pandemic will too be a generation-defining event as well. This can be a suitable time to reflect on some of the lessons that we have learned amid the pandemic.
Let us look at six financial lessons that we may take from this unprecedented experience.
Have a Long-Term View
Recessions and depressions are almost like nightmares for speculative and long-term investors. When the markets take volatile swings, and weak companies lose their rich valuations and most portfolios shrink by a large percentage in a matter of months or sometimes in weeks. The COVID-19 pandemic is also bringing a similar trend.
This shows that how crucial it is to plan your investments for the long term. Even, if you had bought in a hopeful market, the present dip should not startle you and drive you to make rash decisions.
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Double Your Emergency Fund
Investment is one of the best ways to escalate your cash and save for the future, but every option does not give you instant liquidity during unprecedented emergencies. Financial crises come with no stability and predictability. By being short of appropriate cushioning, you might find yourself in adverse situations like being unable to meet both ends.
Emergency funds are crucial as they can help you to get back up on your feet again, even if your income sources subside. However, there are certain situations like the present Coronavirus crisis, where having smaller emergency funds will not provide you enough coverage. Therefore, you should plan for increasing the emergency funds by two folds. This money should be kept extremely handy, like in saving accounts, debt funds, or fixed deposits.
Keep Track of Your Expenses
Most of you must have experienced a significant decline in your monthly expenses amid the pandemic. The expense that you are making currently is what you need for your basic survival. This is the time to compare the value of all the expenses that you are planning to make in the future with the current expense value. The surplus in comparison with your current expense value will show the unnecessary luxury expenditure.
Diversification
Sensex saw a dip from 42k to 27k then a hike from 27k to 50k in the last 1.5 years. Markets go up and down, but you don’t need to do that. When Sensex crashed from 42k to 27k last year, gold hiked by 30%. Although the importance of diversifying your investments can’t be stressed enough, a mixture of equity, gold, debt will provide your portfolio with stability from such volatility.
Have Adequate Insurance Cover
Having an adequate insurance cover is as important as having an emergency cash reserve. It helps in protecting the dependents from financial hardships in your absence. Once the emergency reserve and insurance cover are in place, investors can begin designing their investment plans confidently without thinking about unexpected events which can have adverse effects on their financial situation.
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Succession Planning
The last 15 months made most of us realize or remember that life is uncertain. In these unprecedented and tough situations, money should not be a notable reason to worry. One of the ignored, but very important aspects of financial planning is nomination. It is always a good practice to ensure at the time of creating an asset that you state your nominee. These assets can be your bank account, mutual fund, fixed deposits, PPF account, Demat account, etc. Another step towards succession planning could be the creation of a will. It’s understandable that no one wants to talk about creating their will but having a valid will would give your mind immense relief.
Views expressed in this article are the personal opinion of Akhilesh Gupta, Chief Investment Officer, Aviva India.
