A Key to Financial Independence During Lockdown

The Covid pandemic has brought in the most unimaginable and difficult times. The impact of the economic downturn is being felt across sectors and by almost all individuals. Businessmen are not able to open their shops, unskilled workers have been left unemployed and skilled workers are grappling with pay cuts, bonus forfeits, and pink slips at a time when they were expecting promotions, pay rise, and bonuses. Those who are still holding on to their jobs are not sure about how long will they be on the payroll. This has led to shelving off of countless dreams and plans of the Indian working class.

While the times are difficult, the same times also give you an opportunity to analyze your lifestyle and see whether there are any changes that are required to be made in order to make you financially more independent.

The idea is to make constructive changes in the way you live, the way you save and the way you invest to have more stability and power in your hands for times to come! These changes will not just help you in steering through once in a lifetime difficulties like the present Covid pandemic but will rather help you have considerable financial independence even in day to day activities.

• The pre-lockdown and current expense tracker

Lockdown has given you a perfect opportunity to see if your expenses were more than what is required for a living. Just see your latest credit card statement and compare it with that of Feb 2020. What do you observe? A huge difference! Right? Now, make a list of all the expenses that you incurred pre lockdown for a period of 3 months and categorize them as necessary and non-necessary expenses. The non-necessary expense is where you need to cut down post lockdown. This is the money which if invested and not spent will make a big difference. A rough is that around 25% of your totally monthly expense falls in this non-necessary expenditure.

 

• Liquidity and portfolio tracker – A net worth statement

The next step is to analyse what you hold as of today. Here, prepare a list of places where all your money lies in order of liquidity. The ones that you can withdraw right away are the most liquid (cash is on the top) followed by other investments such as gold, real estate, mutual funds. The statement is the key in your financial planning and will serve as your net worth statement (a typical net worth is more complex but we are not here to become corporate finance experts). A typical statement will look as follows: 

 

Particulars	Amount (Rs.) (Rounded off to nearest 000)	Remarks
Cash and Bank Balance	475000
Gold (Jewellery)	210000	Only to be sold in emergency
Debt Mutual Fund	120000	Can withdraw anytime, current return 6.7%
Bank FDs	350000	Maturing in July 2020 and August 2022, premature withdrawal allowed
Equity Mutual Fund	790000	Invested value 1000000, Equity SIP of Rs. 10000
House	6000000	Non liquid, EMI of Rs. 24000
Other fixed assets (car, etc)	2000000	Non liquid

The above statement gives you an overview of where you stand as of today! The need for this statement is utmost when you plan to make future decisions about your investments. Look at this statement and see how many months of expenses (including EMIs) can you cover with your liquid funds, mainly cash, debt mutual funds, and bank FDs. An ideal cover of 6 months of expenses is desirable. You can also add a column of return and time horizon keeping which in mind the initial investment was made. This will help you to analyze that whether the products selected for the time horizon match with the risk profile. For instance, if you invested in equity mutual funds for a period of 1-2 years the above illustration shows that it is clearly a bad idea because the implied volatility will force you to book losses if you need the money in 2 years.

• Insurance – Are you adequately covered?

A term plan and a family floater health are the only two products that you require for basic coverage. Investment products giving insurance are also desirable but that depends on your liquidity and return requirements and the advice of a financial expert.

A term plan worth 10-20 years of your annual earnings and a health plan providing coverage of around 5-10 lakh per member cumulatively are desirable. Lockdown gives you enough time to go through various plans, so do take this opportunity to have yourself adequately insured.

•  Doing the math

Having performed the above actions will leave you with a few set of documents/excel sheets with a lot of data about your personal finances. The data as such has no meaning till the time it is analysed to make constructive decisions. From the data above the major decisions that you need to make are:

·        What is your total monthly income?

·         How much were your pre lockdown expenses?

·         How much of these expenses are non-necessary in nature?

·         What are your monthly savings?

·         How much money is being invested in insurance premiums?

·         What is the net savings after paying of all expenses and insurance premiums?

·         WHERE DO YOU NEED TO INVEST THIS MONEY?

The last question is the trickiest and the most important one. It is this question to find the solution of which the entire exercise is being done. It is this question the answer of which will help you in making a difference in your life in years to come. Most of us will try to answer the question ourselves, taking the help of friends and Google, but we need to realise that this question can be answered only by an expert. So hire a financial advisor to answer this question. Rather, why only this question, sit with the advisor (virtual conference) and let him guide you in analysing the data that you have collected. Let the guy make a plan for you and suggest you investment products to invest in from FDs to mutual funds and insurance products. If you already have an advisor then you just need to adjust your newly found savings in the current plan and if not then you need a fully fledged new plan.

We lay specific emphasis on this point because adventurism of doing it yourself in this point leads to wrong decisions which undermine your financial health and can prove detrimental to the whole process. You along with a financial expert will chart out the perfect way to deploy your savings. A snapshot of how the final investment schedule will look like is as follows:

Particulars	Amount	Remarks
Net Monthly Savings	50000
Less: Average Monthly Insurance Spend (10%)	5000	Cumulative yearly life and health insurance premium of Rs. 60000
Less: Investment in liquid funds/short term FDs and gold (25%)	12500	Additional contingency fund which will balloon to fund major investments like car replacement, marriage, etc.
Less: Investment in long term debt and balanced funds (3-5 year investment horizon) (25%)	12500
Less: Long Term SIPs in equity mutual funds (40%)	20000

 

Once your plan is ready all is needed is to act on the recommendations and then monitor the same from time to time.

• Positivity

In times like these when you are bound in your home and showered with all the possible bad news it is quite possible to loose your cool at times. But a realisation that loosing cool won’t help and will rather strain your brain and your personal relations should be enough to forbid you to do the same. The focus should be to prepare for a post lockdown world which will be changed, where your needs will be much lesser and where you will value personal relations more! Take out time to do some exercise, meditate and read to lower your stress levels. After all positivity is the antidote to biggest of the problems.

There is no denying in the fact that Covid has brought a lot of uncertainty in our lives and it is bound to stay for the next few quarters. But harder times lead to lifelong learning and this is your time to learn. And if this learning helps you move towards a more secure and independent future then the fun in the whole exercise just increases. So, take the chance and indulge yourself in the self-introspection exercise to have a brighter and secure future.

To discuss further feel free to leave a comment or contact us on finriseinvestment@gmail.com or +91-8568953926.