Five financial lessons from the current Covid pandemic

By Parthajit Kayal

The Covid-19 pandemic has brought the world to a standstill. Probably, this is one of the biggest crises in the last 75 years. However, the pandemic is temporary and most of us are going to sail through this tough time. Moreover, experiencing such a difficult time makes us better prepared for the future. This pandemic encourages us to revisit our financial needs and help us to reevaluate our financial plans.

Increase your emergency fund

Having an emergency fund equivalent to six months of expenditure may not be enough anymore. A crisis like this can keep people out of the job market for a very long time and also bring unexpected large medical expenditure. We should be prepared for the worst and make the necessary arrangements to make sure we get to live our normal life.

Having an emergency fund of at least two years of expenditure could give us adequate protection to fight any future unforeseen circumstances. Individuals should keep the emergency funds in low-risk and liquid fixed income assets.

Recalculate your insurance needs

A good health insurance plan is a must for all. If it’s a family insurance then coverage definitely needs to be higher than Rs 5 lakh. Investors should consider having low cost top-up insurance to increase the coverage amount. Further, adequate term insurance for the main earning member of the family is necessary.

Revisit your financial goals

Travelling and large social gatherings are two things that are stopped due to this crisis. Many individuals keep vacation as one of their major financial goals. Further, expenditure on family functions has reduced substantially. Use the excess money from vacation fund and big family function fund to create a large emergency fund. Further, re-assess your other major financial goals. You may want to create a health fund also.

Reassess your budget

One major realisation from this pandemic is now being able to clearly distinguish between necessary and luxury expenditures. Individuals should take it as an opportunity to reassess their budget and reduce unnecessary expenditures. It would help us generate extra savings that can be used to increase investment or buying much needed insurance coverage.

Rebalance your portfolio

Look at your investment portfolio carefully to assess whether it is reflecting your planned asset allocation and current risk appetite appropriately. You can consider rebalancing your asset allocation based on your present risk appetite. Don’t try to hold on to any bad investment decisions. Acknowledge and come out of it.

Remember this pandemic or economic crisis is temporary. So don’t put your investment decisions and financial planning on hold just to wait for the situation to become normal.

The writer is assistant professor, Finance, Madras School of Economics