Five Financial Lessons from the Pandemic

The COVID-19 pandemic has had major financial repercussions on households everywhere. According to one survey*, 82% of participants reported having faced financial issues during the pandemic. 84% said they had cut down on their expenses as a result of the pandemic. 
Dec 2022
4 mins read
The COVID-19 pandemic has had major financial repercussions on households everywhere. According to one survey*, 82% of participants reported having faced financial issues during the pandemic. 84% said they had cut down on their expenses as a result of the pandemic. Nearly 90% said they were concerned about their financial future. Another survey** found that 39% of respondents had faced salary cuts, while 15% were about to lose their jobs.
These findings show that we need to strengthen our finances, and improve our emergency preparedness. Adversity is a great teacher, and if we absorb the following five financial lessons of the pandemic, we can build a more secure financial future for ourselves.

Lesson #1: Emergencies don’t announce themselves
Emergencies are like uninvited guests — they turn up without warning. The pandemic has shown us that we must be prepared for financial emergencies going forward, with the aid of an emergency fund. Try to keep aside at least 3-6 months’ worth of your salary as a part of this fund, though 6-12 months is ideal to tide you over a crisis.
Expert Tip: Invest your emergency corpus in a liquid avenue, like liquid funds (a type of mutual fund). This potentially allows you to earn substantial returns and also redeem the fund instantly in an emergency – a win-win solution.

Lesson #2: Insurance goes a long way
Insurance provides protection from financial losses during emergencies, giving you an additional safety net. Make sure you have adequate cover to mitigate the impact of illness, hospitalisation and even sudden death of a family-member on your finances.
Invest in a suitable term life insurance plan with a high sum insured, at least 10 times your annual salary, to provide for your family in your absence. Alongside this, get a comprehensive health insurance plan with a high sum insured of Rs. 5 lakh or above. Get all your family members covered under a floater plan so that if any of them faces a medical issue, you don’t have to shoulder the burden of the treatment costs.

Lesson #3: Cut out those unnecessary expenses now!
Impulse buying is injurious to your finances. Cut down on avoidable spending in favour of saving or investing. The pandemic has taught us to live more prudently so that we can put money aside for a rainy day.
Create a budget at the start of every month, factoring in all necessary expenses and sources of income, and allocate money for saving and investment. Keep aside at least 7-10% of your income for savings. You can also follow the 50-30-20 rule, that is, 50% for necessary expenses, 30% for discretionary expenses and 20% for financial goals.

Lesson #4: Investments keep your financial planning on track
Everyone has financial goals, such as buying a house or a car, going on an international trip, or planning for a child’s education. It’s important to invest money towards achieving these goals when you have sufficient disposable income.
Try to earmark your investments to your financial goals by starting a Systematic Investment Plan (SIP) in a few good mutual fund investment schemes. This enables you to track your progress towards the goals by looking at the status of the investment. It also ensures that an emergency cannot derail your financial plans and you will remain on track to achieve your goals.

Lesson #5: Diversification can cut losses
There was a steep fall in the stock market during the pandemic as it tumbled 38%***. Stocks in the hospitality, entertainment and tourism industries fell sharply by 40%***, but on the other hand, those of the FMCG and pharma industry witnessed growth due to increased demand. Meanwhile, gold became an in-demand metal as investors considered it a safe option in uncertain times.
The success of some instruments vis-à-vis the decline of others teaches us one simple lesson-diversification is the key to a balanced portfolio. The adage “don’t put all your eggs in one basket” holds true even for your financial portfolio. Investing in only one or two types of avenues can be risky, because if they experience a decline, your entire investment will suffer. Instead, diversify your portfolio and invest in equity, debt, gold, and other instruments to spread your risk.

In an increasingly uncertain world, we can never know what the future holds. There could be another pandemic someday, or another emergency we haven’t even contemplated yet. Our task is to learn the lessons of this pandemic and strengthen our finances in anticipation of the next crisis. Consult a professional financial advisor and implement these lessons to make your finances bullet-proof!

Disclaimer: Mutual fund investments are subject to market risks; read all scheme-related documents carefully.
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