Over the last 18 months, the world has completely changed. A small virus that seemed to come out of nowhere spread across the globe and claimed millions of lives. The health calamity of enormous proportions also brought with it uncertainty in the economic sphere, spanning across stock markets, incomes, employment and so on. Across the world, stock markets first tumbled, making equity investors lose money, and then bounced back stronger.
However, incomes and employment haven’t bounced back as strongly. Taking a cue from the experience of the last 18 months, here are five ways to manage your finances to overcome uncertain and difficult times.
Avoid panic selling
Time and again, history has repeated itself, especially when it comes to stock market crashes. While it seems like it could be the end, markets always bounce back, and often more strongly than they fall. The freefall in the global stock markets made investors uneasy, leading to a lot of panic selling last year. However, just one year later, the markets have bounced back to all-time high levels, breaking records every other week. When portfolios tumble during a crash, there is a strong impulse to sell stocks and minimize losses, but this is the worst possible course of action. By selling equities at a lower price, notional losses become real. The value of most stocks will stabilize when normalcy returns. By selling shares, investors will only monetize their losses. Hence, they should hold out and wait for the volatility to end.
Re-evaluate your budget
Every well-managed household works on a pre-decided budget. Usually, the budget get affected by changes in household income. Due to the uncertainty plaguing income, drastic measures may need to be adopted to ensure that expenses do not increase.
Households need to re-evaluate their budgets and sort expenses as per relevance.
“They need to demarcate between necessary and luxury items and take a decision to forego the latter for the time being. It is crucial for households to take this decision for financial stability till the threat abates. It will be ideal for households to toss out frivolous expenses and spend money only on essential items and services. Unessential expenses could be those on entertainment, gourmet meals, fashion, etc,” says Ashwin Ramakrishnan, associate vice president - financial services, Aranca.
Have a contingency fund
Having a rainy-day fund for emergencies and uncertain times is a must. It is highly advisable to save and create an emergency fund when the times are good. This fund can provide a cushion in trying times such as these. Households should immediately start creating such funds once the epidemic is over so that they are ready for any hardships in future.
While what we are going through is a global health crisis, uncertainty can come in many forms. However, health emergencies and death of breadwinners are among the most common events that bring extreme uncertainty for families, as has been the case during the pandemic too. To prepare for this, people must choose good health and life insurance plans. These are instrumental in strengthening them to cope up with an unanticipated emergency during the pandemic, and even otherwise. Lack of insurance leaves an individual as well as the family members vulnerable. So, opting for life and health insurance plans that support the entire family is a must.
Do not ignore credit card payments
One must not delay their credit card payments even during an economic full stop. Credit cards charge a high rate of interest on pending payments and directly affect your credit score. Hence, if there is a liquidity crunch, at least the minimum payments must be paid to avoid huge bills later. This will ensure lack of interest on delayed payments that worsen the cash crunch.
Following these few simple tips can help households weather any financial storm and emerge from it unharmed. More importantly, when things get back to normal, they will find themselves in a stronger position with no extra liabilities.