MANAGING PERSONAL FINANCES IN COVID ENVIRONMENT

COVID 19 has brought the world to a standstill situation. Much ink has been spilled to discuss the effect of Corona on world economy in this uncertain environment. The uncertainty is mainly due to two factors, Situation & Duration. We are not sure how worse the situation is going to get and secondly how long will this continue

This uncertainty has made all countries, organisations to re-think on their finances. This pressure is equally pressing for every individual for his/her own economy (i.e. budget). Different individuals are at different sphere in terms of effect of this pressure as some have lost jobs, some have their business being closed, some are foreseeing reduction in their income and some are ok or now as either their income levels are not affected due to they being paid even though they are not working or some have regular income flow due to they being able to work from home. The uncertainty of the environment is so much that

“Income is looking smaller and expenses are looking bigger”

hence not thinking and not planning for personal finances is not at all an option.

In this article, we have tried capturing views how different fundamentals of finances (Income, Expenses, Assets and Liabilities) can be looked at and evaluated. Suggestive fundamental shift from legacy principles is to prioritise cash positions over income with extra layer of surety. To be able to so for income and assets these should be looked at conservatively i.e. add this to your cash flow strength only if these are confirmed while look at expenses and liabilities in realistic way i.e. keep it in your outflows until you have all the good reasons to believe that these will not be incurred.

Article below is in two parts. First part is concise view of suggestive approaches and points for consideration while second part talks of approach and points for consideration in detail.

PART I - CONCISE VIEW OF SUGGESTIVE APPROACHES:

A. INCOME (INFLOWS) 

“Re-assess income in multiple scenarios (best case to worst case) for different short-term time windows (1 month, 1-3 months, 3-6 months)”

 -   Salaried individuals or businessman to assess income levels in different scenarios say (no change, 25% reduction, 50% reduction or 100% reduction) based on the situation of their job and businesses.

-   Assess income for different short-term windows (say 1 month, 1-3 month, 3-6 months)

-   Rental income may not be a confirm source of income in short span

-   Interest income from bank continues to be confirmed source of Income

-   Income from trading of mutual funds/shares or dividend cannot be banked on in short run.

-   Income Tax refunds below < INR 5 lacs if received can add to cash inflow (India specific)

-   Refunds of advances of some future expenses can help to cash flow

-   Alternate avenues of income if executed in right manner can add to cash flow.

 B. EXPENSES (OUTFLOWS)

 “Bifurcate expenses (outflows) into real essentials and non-essentials and spend accordingly”

-   Food, medicine, clothes, utilities are essential with scope of savings

-   Insurance expenses should be marked essential

-   Tax savings related investment for Fiscal year-ending 31 March 2020 can now be made till June 2020 (India specific).

-   Pay-out to household staffs to be considered essential by everyone who can afford it.

-   Entertainment expenses are non-essential

-   All Travel expenses and local conveyances will not be incurred in lockdown period and post lock-down period, these may not continue as essential for the same quantum.

-   Donation for both COVID and Non-COVID purposes should be marked essential by everyone who can afford it.

-   Fee for kid’s education continues to be essential

-   Earmarking a portion for future contingency to continue if possible

C. ASSETS (FUNDS)

 “Re-evaluate assets for their liquidity status and planning when to liquidate them”

 -   Fixed Assets (i.e. property) climb up the chart on non-liquid side.

-   Investment in luxury items like Jewellery, cars, watches also climb up chart on non-liquid side

-   Investment in shares and mutual funds are liquid but only after incurring loss due to stock market condition

-   Loans to friends and relatives may also change its color depending on their positions.

-   Bank Balances and fixed deposits remain liquid

-   PF to the extend of 75% of balance or 3 months of basis pay can be consider liquid (India specific)

-   In case of extreme cash crunch situation, investment insurance plans can be encashed at surrender value.

D. LIABILITIES

 “Re-check if committed liability pay outs can be delayed and at what cost”

 -   Evaluate if RBI announced 3-month moratorium should be availed and it will cost how much. (India specific)

-   Credit card payments are not part of RBI 3-month moratorium scheme. (India specific)

-   Loan repayment to friends and relatives need to be considered depending upon how critical this is for them. 

E. FINANCIAL COMMITMENT WHICH ARE NOT YET ACTIONED

 “Re-evaluate upcoming financial commitments which are not yet actioned,in line with above suggested approaches for income, expense, asset and liabilities”

 -         Upcoming fixed investments like in house/land, cars to be re-evaluated for in hand liquid funds, revised credit repayment capability and on the parameter of essential vs real essential.

-         Upcoming big expenses like marriage expenses in family, travel, to be thought through again for time windows when you intend to spend and on the parameter of essential vs real essential.

-         Those who are in between decisions of new job, new business need to re-think those in parameters of stability vs uncertainty.

PART II - SUGGESTIVE APPROACHES IN DETAIL:

A.     INCOME (INFLOWS): 

Depending upon the work and investment choices of an individual, an individual may have their income from salary income, business income, rental income, interest income or some royalties etc. In the present environment of uncertainly, the suggestive approach is to:

“Re-assess income in multiple scenarios (best case to worst case) for different short-term time windows (1 month, 1-3 months, 3-6 months)”

Following are additional points which can be used in this re-assessment approach:

1. The first aspect to evaluate in case of income is re-assessing income in multiple scenarios from best case to worst case. Some sectors like aviation, hotel have already started to reduce/cut salaries and even talking about layoffs. A big section hasn’t really seen any salary cut so far but many companies have started hinting about salary reduction in coming weeks/months. Small business-mans who are not in the business of essentials are also impacted due to their inability to operate in lockdown environment.

Hence re-assessing income in multiple scenarios will help individuals to quantify extremes of income level and how much one needs to prepare for it. Best case and worst-case scenarios can be no change, 25% reduction, 50% reduction and 100% reduction in income level.

2. Second aspect in assessing income is the time window. In present environment, it is critical to look at this in different time windows (suggestive windows are 1 month, 1-3month, 3-6 month) so that people look at their finances for a foreseeable short-term time span. Lot many are not affected today but there are enough indications that it will impact a significant population at different sphere of time.

3. People dependent on rental income might feel that they have confirm source of income but in present uncertainty, lot many people are not in a situation to pay rents due to their own business or jobs. Accordingly, all the landlords may not be in situation to insist for rent and it will impact their finances.

4. Interest income from formal sources like bank may be considered confirmed as banks and economy is in the position of paying interest.

5. People who were dependent on the profits from trading of shares/mutual funds or dividends from these investments, have already seen stock market crashing. With over 25% market cap being eroded, people cannot really bank on this as their regular source of income. Hence, income from stock market-based investments are not confirmed.

6. Some individuals may be benefited by the recent announcement of Government of India wherein it was announced that they are speeding up the refunds of Income tax valuing less than INR 5 lacs. This can add to the inflows of small taxpayers for temporary period.

7. Many individuals as per their regular planning, would have made advance payments for some upcoming expenses (i.e. travel plan, expensive possession like cars, watch etc.) which may not remain in the essential category (also refer expense section below) and refund of those advance payments can add to the cash flows.

8. Looking back at your own archive of strength or product is one key avenue which can be explored to add to the income. In present time, when no new program was coming on TVs. Doordarshan launched Ramayana and Mahabharat from their archives. This helped DD earn big by just looking back at its strength. All individuals in their job, business need to look back at their archives to check if they have something to offer from their past or can they learn something new which otherwise they were not able to which eventually can increase income flows.

9. Present environment has also brought lots of possibilities. Businesses of life essentials (as described by Govt.) and businesses via digital media are leading and growing even in present environment. People can look at alternate avenues or think on upgrading their business which are banked on these principles. Individuals can also look for work from home options. Businessman can look at how to use more and more digital platforms.

 B.     EXPENSES (OUTFLOWS): 

Every individual is mostly very prudent when it is about spending from his/her hard-earned income and he always strive to get maximum value out of those spend for his own or his family’s satisfaction. But in present environment, when normal is no more normal, it is essential to look at all expenses with the idea of:

“Bifurcating expenses (outflows) into real essentials and non-essentials and spending accordingly”

Some specific food for thoughts which can be useful in this bifurcation are:

1. Food, Medicine, rental, utilities and clothes will go in the life essentials by default. But within this essential there is a layer which has big potential of saving.

- Food is now about what one need at home and not necessarily what is spent in restaurants and hotel.

- In medicine also, people are talking about redefining essentials which are really needed. Lot many non-essentials can be managed with home treatment (do refer the immunity boosting suggestions by Ayush Ministry of Govt of India). Lot many cosmetic treatments can also now easily be classified as non-essential.

- Electricity, water is counted as essential, but people should really look at how wastages can be avoided.

- In terms of spending on clothes which has automatically come down drastically and people would need to vouch for these even post lock-down period.

2. Insurance expenses (term insurance or investment plans or Mediclaim) should be counted as essentials. Insurances are to cover uncertainty and present instances are great example why people should take insurance plans. Until this is situation of extreme cash crunch, people should keep honouring their insurance commitments.

 It may also be noted that investment for the purpose of income tax benefits for the financial year ending 31 March 2020 can now be made till 30 June 2020 and still be claimed as deduction in the return of FY 2019-20.

3. Pay outs to household staff in normal situation is a non-essential category and the general gyaan is to save money by being physically active yourself. Present situation is different and for all the human reason, this spend should be considered essential to the maximum possible extent by all who can afford it. With this, we all can contribute towards society as household staff is at the risk of losing livelihood due to lock-down.

4. Entertainment expenses (i.e. movies, hotels, parties) in any case have come to standstill. But additionally, people have realised that there are many other non-expensive ways to keep yourself engaged and entertained. So, this category can be marked as non-essential.

5. Travel plans – All travel expenses in short term of lockdown are non-essential as no one can really travel. Post lock-down, individual will be judicious of their choices by restricting themselves for essential social needs rather than relax needs.

6. With work from home options and restrictions on movement, spent on local transport expenses has changed its course from essential to non-essential. So, a right assessment of this need to be done. Which presently is zero and in short term will be way less as per trends

7. Contribution/Donation for COVID response – In this stressful time, donation/contribution for COVID response should be marked as essential by all those who can afford it. Right money in right hands is the need of the hour.

8. Contribution/Donation for non-COVID purposes – In present time, while COVID has taken precedence, the needs and areas where otherwise contribution/donation was needed still stays. Hence, people should count this as regular essential.

9. Fee for kids’ education – With all happiness, people will mark this as essential. All individuals may want to check with the respective institution, if there is any change/relaxation in the payment plan/instalments. 

10. Keeping a portion carved out for contingency – All individual plan for future by carving out a portion of income as saving. This saving even in present time if possible, should be marked as essential to be taken off from the present income level.

 C.      ASSETS (FUNDS): 

People over-time create assets/investments for self-satisfaction or keep them as asset for any future need. All these investments by most are done with the adequate sense of their liquidity status. These liquidity status for some of the assets in stressful environment have changed and all individuals should look at look at all their Assets/funds with the idea of:

“Re-evaluating all assets for their liquidity status and planning when to liquidate them”

Some specific food for thoughts which can be useful to test liquidity are:

1. Fixed investments like investment in property by their default nature are fixed and in present environment, finding a customer for that will be more tough. So, these fixed assets climb up the chart on non-liquid side.

2. Investments in jewellery, stones, cars which meant for personal satisfaction rather than any real need are non-essential. Further challenge will be in selling them in present stress time as not many will prefer to invest in these categories. Hence, these also climb up the chart on non-liquid side.

There is one contra view. Investment in gold is now being considered a better investment option by many as stock market is trembling. And as per an industry report, gold is expected to give better yield in coming period. But still the gold investment is only for those who really have surplus fund. 

3. Investment in shares and mutual funds has always been considered semi-liquid provided and people liquidate them at the time when they feel the time of the purpose for which it was invested, has come.

But the way the stock market has behaved and 25% plus market erosion has happened, these investments are appearing non-liquid. Individuals who are ready to bear the burden of loss, can still look at this as liquid and convert into cash. But beware, it is coming at the cost of unrealised loss converting into realised loss.

Suggestion for this category is to go as per market experts and look back if you really want to encash it. People may hold on to these if they are not in deep cash crunch.

3. We as individual keep helping friends and relatives in their needs by giving them loan. Under COVID environment, if the earnings of those relatives and friends is affected, then this asset also changes its’ color of liquidity.

4. Bank balances and fixed deposits continues to have their liquidity at same level. Idea will be spending this judicially.

Additionally, as per Govt. norms banks shall not be charging anything for not maintaining minimum balances in savings bank account.

5. Investment Insurance policies have been a preferred choice of investments because theses have good return and provide insurance cover. These policies also have a surrender value i.e. these can be encashed before their term. With due weightage to surrender value, individual may look at this for liquidity. But that should be last resort because similar insurance covers at later stage are always expensive.

6. Provident Funds are earmarked by individuals for retirement. As per latest COVID relaxation measures, Govt of India relaxed norms to withdraw PF to the extent of 75% of the PF value or 3 months of basic and Dearness Allowance (whichever is lower) to meet the temporary cash needs of individuals. While Govt has relaxed this, individuals need to be careful here on needs for essentials vs non-essentials. This money is coming out of their retirement corpus.

 D.     LIABILITIES: 

Many individuals have committed liabilities in the form of different loans that they have taken for either to acquire assets, to fund their kids’ education, for business or for some precious dreams like foreign travel. These regular commitments may also become stressful depending upon inflows of individuals. And it is equally critical that all individuals honour their commitments to maintain their credibility and credit rating. So, the action which all can take for their liabilities is to:

“Re-check if these committed liabilities can be delayed and at what cost”

Following points can be used to re-check these liabilities:

1. Recently, Reserve Bank of India came with a 3-month moratorium period for all loans i.e. Individuals can defer their instalments for principal or interest for 3 months without any impact on the credit rating. On the face this looks lucrative, but the catch is that it is only deferment and interest will continue to get charged. Hence, all individuals need to really weigh between ability to pay vis-à-vis interest cost. Those who are facing severe cash crunch should opt for this. This eventually mean higher interest cost and extended loan tenure.

Also, the point to note is that this is not automatic. Individuals need to opt with specifics to bank to avail this relaxation.

2. Other regular liabilities for most individuals is credit card payments. These need to be discharged by all individuals and no moratorium has been announced for this.

3. Loan repayment to friends and relatives - Present environment being stressful is problematic to all. Hence, while it may not have attached banking regulations, but paying back those who have helped individuals in personal capacity continues to be essentials.

 E. FINANCIAL COMMITMENT WHICH ARE NOT YET ACTIONED

In the dynamic world, things keep evolving and many individuals will also have financial decisions which are yet to be completed and those decisions may be at different stages of commitment i.e. a news house/land deal, a new car purchase etc. Individuals plan for these commitments with their due analysis but as these are now stuck in transitionary phase and some additional thoughts on that should be to:

“Re-evaluate upcoming financial commitments which are not yet actioned on the line of above suggested approaches for income, expense, asset and liabilities”

Some specific thoughts for these are:

1. Some of these upcoming commitments can be investment in a new house/land deal, a new car, Jewellery. Individuals may want to re-think on their status of funds with them or if these are proposed against loan then strength of individuals to pay back those loan with different income scenarios. Principle of essential vs non-essential will also be critical to decide, if one should really move forward on that.

2. Many individuals would have planned some huge expenses i.e. marriage of a family member or overseas travel plan. Presently, it is lock down across and lot many things will take time to become normal. Hence, along with thinking on this for time-window, thought of essential vs non-essential will also be critical here.

3. Many will be in the process of new business or a job change. The approach here can be that until it is really forced by your present environment and nothing can really be done to stay where you are, it should be re-evaluated. The new Job or the new business is sector of essentials or non-essentials goods/services as we are seeing in market, should also be baked as criteria to decide next step.

Poonam & Manoj Madaan [ These are our personal views and thoughts :-) ]