5 critical money lessons taught by the Covid-19 crisis

Tough times are great teachers too. They teach us many things. Let’s discuss a few critical money lessons the coronavirus crisis has taught us.

The Covid-19 crisis has severely impacted most investment avenues.

The ongoing Covid-19 pandemic has not just endangered millions of lives across the world, it has also dealt a mighty blow to the global economy to an extent that a recession looks unavoidable. That being said, tough times, like the one we currently find ourselves in, are great teachers too. They teach us many things, like the importance of financial preparedness to be able to take on any adverse eventuality effectively. Let’s discuss a few critical money lessons the coronavirus crisis has taught us.

1. Never take a loan you cannot afford to repay

Loans, when managed well, are great enablers to fulfil our critical life goals like buying a home or a car. Loans at times could also bail us out of a financial emergency. However, it’s critical you evaluate your repayment capacity carefully before signing up for any financing facility as an unaffordable loan could not just destroy your finances but may also lead to a loss of a precious asset and cause immense psychological stress along the way. And especially during a tough time like the current one when a loss of income could be on the cards, repaying an unaffordable loan could get even more challenging despite some short-term relief from the government. The lesson being, never over-borrow and have a contingency plan to be able to repay your loans in full on time.

2. Always have in place an adequate emergency fund

No contingency plan is complete without an adequate emergency fund. We understand its importance in times like these when many among us are losing our income as the economy comes to a grinding halt. An emergency fund is a great way to meet our day-to-day liquidity requirements in the absence of a regular income or while tackling any other type of financial emergency. It’s important to ensure your emergency fund is worth at least 6 months of your expenses; however, you may want to increase its size further to be in line with your requirements. You may also want to park your emergency fund in a high-interest savings account, a fixed deposit or even a liquid mutual fund for some capital appreciation. So start building or replenishing your emergency fund before it’s too late. You can do so by utilising your declining expenses during the lockdown and exercising strict cost-cutting measures and cutting down wasteful spends going ahead.

3. Do not rely only on your employer-provided health insurance plan

The coronavirus crisis has already started forcing some employers to reduce their staff and things may deteriorate further if the economy doesn’t bounce back quickly. In such a situation, managing a medical emergency that requires hospitalisation could get extremely difficult as you would no longer have your employer-provided group health insurance coverage. The resultant financial burden could drain your precious savings, require liquidation of essential investments, or push you into debt. As such, it’s always advisable to get a comprehensive health insurance plan for yourself and your dependent family members even if you are covered by your office policy. Simply because the employer-provided policy may offer insufficient coverage, lack necessary add-on protections, and would lapse once you lose your job.

4. Prepare your will and timely complete your nomination formalities

It’s not very uncommon for people to delay readying their will and completing their nomination formalities. As a result, if they pass away unexpectedly, say, due to a sudden pandemic, their family members have to struggle for years to claim the inheritance – something that would only add to their personal sorrow. Worse, at times it leads to legal disputes which may take years to get resolved. The lesson being, do not delay preparing your will and always ensure you’ve completed the nomination formalities pertaining to all your insurance policies, investments and retirement funds in time so that your legal heirs avoid unnecessary suffering in your absence.

5. Diversify your investment portfolio to mitigate risks

The Covid-19 crisis has severely impacted most investment avenues. The resultant market volatility has wiped off years of profits, deposit rates have slumped, small savings schemes are offering lower returns, and the realty sector is undergoing an extreme slowdown. However, gold investments have fetched good returns. The lesson being, always try to spread your investments across various asset classes with varying degrees of risks and returns in order to minimise the overall investment risk. Equally important is to strictly align your investments to your risk appetite, financial goals and liquidity requirements and not chasing unrealistic returns targets from your investments. Lastly, do not discontinue an essential investment without thinking it through because the longer you stay invested, the better are your chances to fetch desired returns. Don’t hesitate to consult your financial advisor if you need help in strategising a diversified investment plan.

(The author is CEO, BankBazaar.com)