Money talk: Get ready to face macro headwinds

There is no doubt that this is a tough time for the Indian economy. Growth has slowed down to rates not seen since 2008-9. Consumption has fallen. Businesses have been pushed to the brink. Pundits have sounded the alarm bells.

At such a juncture, cost-cutting measures become necessary not just for businesses, but also for individuals. Here are some steps you can take to fortify yourself against loss of employment and come out on the other side of this downturn unscathed.  

Build that emergency fund
In many articles for this publication, I have written about the need to build an emergency fund. We are in the kind of situation where it is most reassuring to have the cushion of a few months’ worth of your income safe in your bank. It will help you absorb the stress of retrenchment. If you have not built your emergency fund, there is no time to lose.

Create a fund that is at least 3-6 times your current income or go bigger if you wish to. Use a bank recurring deposit for this. The emergency fund covers your essentials expenses such as EMIs, rent, insurance payment, children's fees, healthcare expenses, groceries and utilities - basically, expenses you can’t avoid even if you lose your income.

Don’t use it for discretionary and lifestyle spends. While you are working on your next source of income, this fund will keep your family afloat.

Make sure you are insured
Losing your job means you are also losing your corporate health cover. The last thing you need when you don’t have regular income is a hospitalisation that will decimate your savings in days. Therefore, insure yourself or any member of your family who will lose their coverage with your loss of employment.

If you are a person with dependent family members, have liabilities such as a home loan, then get yourself a term plan which will fortify your family’s finances even if you were to meet an untimely end. Being insured, you can have greater peace of mind while you consider your next career move.

Collect your dues
Every rupee counts. As you transition out of your current job, ensure you collect all your dues, reimbursements, bonuses and any other pay-out you are eligible for. Needless to say, you need to be frugal at this point. Your full-and-final cheque may take a few weeks to arrive, and your salary may be withheld during your notice period. Your next pay cheque may also be months away.

Therefore, to get through this in-between period without any cash in-flow, you need to cut back on avoidable expenses. Planned a foreign holiday? You may want to postpone that. Eating out frequently? Get some home-cooked meals. Need a new phone? It will have to wait. A penny saved is a penny earned, and you must have your priorities straight in these times.

Don’t exit your investments in a hurry
You may have several investments and deposits. If you lose your job, should you break all of them open? Not exactly. Avoid the urge to liquidate all your investments at once. For example, your provident fund money is meant for your retirement. Your mutual fund SIPs may be for your long-term goals such as a home purchase. You must remain on course for those goals even if active investing takes a break during your retrenchment.

Firstly, dip into your investments only if your emergency fund is inadequate. Secondly, determine an order in which you can exit your investments. For example, liquid investments such as fixed deposits can be used now. You can start with the ones paying the lowest interest rate.

Then there are investments with the least potential for growth and returns — for example, stocks with a bleak outlook, or any insurance policy that's paying you less than your savings account. Only after you have exhausted these, dip into your long-term investments. But remember to replenish those long-term investments once your career is back on track.

You might need a credit card
During your retrenchment period, you may need some credit from time to time. You can manage your short-term borrowing needs with a credit card. This may help you avoid taking a big loan or borrowing from friends and family. However, the key here is to get the credit card while you still have your job.

It would be much more difficult to get one during a break from employment. Ensure absolute financial discipline while you use any form of credit during your retrenchment. While minimum payments will lead to hefty interest payments, late payments will dent your credit score and make future borrowings difficult. So borrow as little as you can, and pay it off as soon as you can.

Lastly, this being a trying time, take care of your physical and mental health. Ensure you eat healthy and get adequate rest. You can use the break in your career for learning new skills and preparing for your next opportunity. With your finances in place during this transition, you'll have fewer worries and greater peace of mind.

(The writer is CEO, BankBazaar.com)