The COVID-19 pandemic had taken the world by surprise. It is clear that the world was not prepared to handle a crisis of such a large scale. It has taught us quite a few important lessons the hard way. From a financial perspective as well, it has caused stress to several thousand people throughout the world with large scale layoffs and pay cuts across different sectors.
Here is a look at the top 11 learnings that we can take from the pandemic. We can use these lessons to safeguard our finances and be better prepared in future for such events.
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Emergency fund
The worst affected people by COVID were those who did not have an emergency fund in place. An emergency fund is a sum of money roughly equal to 6-9 months’ worth of expenses. That amount is put aside to deal with unforeseen circumstances such as those that arose during this pandemic. It acts as a cushion against any financial shock and gives sufficient time to recover from it. If you don’t already have one, please do create an emergency fund at the earliest. Read this article to know more about how to create an emergency fund.
Panic selling of stocks and mutual fund investments
In the height of Covid, when the markets went for a toss there was widespread panic among the masses. People were selling off their stock and mutual fund investments in a hurry. Word of mouth spread like wildfire from friends and relatives and soon there was a stampede to get out of the stock market as soon as possible. In only 12 months post the Covid induced lockdown in March 2020, the market bounced back by more than 30%! Those who had remained invested calmly in spite of panic selling reaped the rich rewards and made tons of money. It is always wise not to time the market and instead invest through SIPs at regular intervals preferably monthly. It is actually at these low points that you can buy more units at the same price and hence make more money when the market bounces back.
Importance of saving
Covid showed us the importance of savings and cutting down on unnecessary expenses. There was a spike in the monthly savings across different households in India during the period of lockdown last year. Also since many restaurants, shopping malls, movie theatres across the country were closed this naturally stopped people from impulsive buying. Check out below article to know about the top 30 ways to save money,
30 ways to save money in India
Proper asset allocation
It is also prudent to have proper asset allocation based on your age and risk appetite. The younger you are, the more risks you can take. The risk-taking ability decreases as you grow older and move closer towards retirement. People between 25-40 years of age can have 70-75% of their portfolio invested in equities and the remaining invested in debt. People aged above 40 should decrease the equity allocation and increase the debt allocation. They can have 60% and 40% allocation to equity and debt respectively.
Health insurance is a must
Millions of people have lost their jobs—and employer-sponsored health insurance—since the start of the COVID-19 pandemic. While some people might be able to stay on employer benefits for a while or shift to their spouse’s or parent’s coverage, many others will have to seek coverage elsewhere.
It’s always important to have additional insurance on top of the one provided by the employer. So that in cases of job loss, we are not left exposed to high medical costs.
Diversification is important
Don’t put all your eggs in one basket is a famous saying in the financial world. And it was proved even more true during the pandemic. People who reaped the maximum rewards during this phase were those who had spread their investments across various asset classes. Based on your age and risk appetite, you should diversify your investments across different products such as stocks, equity mutual funds, debt mutual funds, Government bonds, PPF, fixed deposits, etc.
Invest in gold for the rainy days
As a thumb rule, gold prices usually rise when the stock markets decline. Gold hits the bulls phase when the stock markets are in the bear phase and vice versa. And it was no different this time as well. In the last one year, gold funds have offered average returns of 26.84%. In the March quarter, Gold funds topped the return charts with 11% returns.
Repay debts and minimize borrowings/loans
Buying cars, expensive houses and other items of luxury on loan are fine as long as you can afford to pay them comfortably without impacting your finances. Else sudden situations such as the COVID can put your finances in a really tight spot. And on top of that, if you face a pay cut or worse a job loss then the situation becomes even more difficult. As a thumb rule, do not exceed your EMIs to more than 1/3rd of your monthly income. And if you have any outstanding loans, try to pay them off as soon as possible.
Have multiple sources of income
As clearly shown by the COVID pandemic, relying on only a single source of income is extremely risky. Millions of people all over the world have lost their jobs as companies went into a cost-cutting mode which led to layoffs on a large scale. Hence it is always safer to have multiple sources of income. They help to safeguard against unexpected events such as a job loss. Additionally, it also provides peace of mind knowing that you have multiple sources to back you up at all times.
Read the below article if you want to know more about how to generate additional sources of income: